Insights & Advice

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Profit Taking

It has been six weeks (29 consecutive trading days) since we have seen a 1% decline in the averages. Given that last year it was practically a daily occurrence, most investors are breathing a sigh of relief. That is starting to worry me.

Cut back a little

As a born-again contrarian, I find when most people are leaning one way I tend to start leaning the other. If you have followed my advice and been invested in a dividend and income mostly portfolio, you should be up over 5% so far this year, and its only February.

Frankly, I thought the S&P 500 Index would peak out on a short-term basis at around 1,350-1,365 sometime in March of this year. Well folks, as of this week we actually came within 11 points of the top of my range. Is it time for some profit taking?

Markets never go straight up although there have been times when it appears they want to. On occasion over the last few years, stocks have been supported by the policies of central banks around the world. We are in one of those periods right now. In my last column I wrote that the Fed has given stock investors the green light to remain in the market and buy even more equities. Their easy interest rate policies, a tame inflation outlook and increasingly good numbers on the employment and economic front provide support for buying stocks.  

That should come as no surprise to you, my readers, which is why you should still be invested in the stock market. All I am saying is that you should be prepared (and willing to sustain losses) during a period of profit taking sometime soon. How much downside this will cause is debatable. We could see as little as a 1% pullback to something more like 5-10%.

“But 5% would just about wipe out my profits for the year,” said one reader recently.

No question about that, which is why those who hate to suffer the vagaries of the stock market, might be advised to raise a little cash around now. There is nothing wrong with taking a few profits here and there. It would simply be the smart thing to do, especially if you are heavily invested in aggressive stocks and funds. I still think the year overall will be positive. I just don’t expect this straight up kind of market we have enjoyed since Christmas to last much longer.

Stock markets normally discount good news ahead of time. It seems to me that we have already discounted most of the good news out of Europe, the strong numbers out of our own economy, and the decline in the unemployment rate. When markets are priced to perfection (as they are now in the short term) it doesn’t take much to stall their momentum.

Friday, for example, Greece weighed on stocks as investors started to lose patience with the umpteenth round of negotiations between Greece and the EU. I noticed that the stocks that have gone up the most this year experienced the most profit taking.  Although the overall averages (Dow, S&P and NASDAQ) have been up marginally throughout the week, certain indexes, like the high flying Russell 2000 small cap index, has seen profit taking. Many times the Russell is a leading indicator of things to come in the overall market.

As such, I am advising readers to add a little caution to the present euphoria by remembering the prudent investor always hedges their bets a bit.

Posted in A Few Dollars More, At the Market