Investors Are Becoming More Selective

Over the past couple of weeks, I’ve been taking some profits in real estate and financials as we began to see some red flags.  There was nothing major screaming to sell everything.  But, being prudent and locking in gains never hurt anybody.  It looks like I’m not the only one taking profits.  The indices were down from .5% to 1% today.  Now, we’re within just a few points of breaking the uptrend that’s been in place since March on the S&P 500. If you & I see this, certainly all those fancy computers in New York see the same thing and the sell orders may multiply making the sell off pick up steam if we do break those technical levels.  The volatility has been very low lately and I don’t expect that to stay this way forever.

More importantly than the charts though, which really haven’t helped anyone make money during this rally, are the underpinnings.  As I’ve been discussing on my daily radio show, we were vulnerable for a pullback but signs of a major top aren’t present.  There have been too many stocks still making new highs and frankly just too many stocks going up compared to the ones going down.  In other words, the market has continued to spread out.   That usually turns down 4-6 months in advance of a major market top.  However, that doesn’t mean we can’t get a “real” correction in the meantime.  When I say “real”, I mean one that really makes everyone question if this is the end of the rally.  We haven’t had any type of meaningful correction since June when the indices fell about 10% from top to bottom.  Some may say we’re due.

As far as the underpinnings, the stock market may (keyword may) be entering the more selective stage.  That means the easy money has been made and investors begin to cull out weak stocks or lock in profits on strong stock and re-allocate to other areas.  It’s a natural progression of a longer-term rally.  That doesn’t mean we’ve peaked for the year.  However, it means that owning huge baskets of stocks & bonds, which has worked beautifully for months, may be coming to an end.  It’s simply too early to tell.  But, the internals have begun to weaken ever so slightly.  Are sellers finally willing to sell some of their holdings?  Something to keep an eye on in the days ahead.

U.S. Dollar

There have been so many bears on the dollar including myself which has made me cautious that we could get a violent countertrend rally in the dollar causing sell offs in materials, commodities, emerging markets, gold, etc. Today, a rally in the dollar caused just that.  For the short-term, it may just be the beginning.  The Powershares DB U.S. Dollar Bullish Index ETF (UUP) was up on enormous volume both on the ETF & the options of the ETF.  It’s very close to breaking out (see below) and this could be a nice trade (I’m still very pessimistic about the dollar longer-term) especially as a hedge against those positions we want to keep but could fall in price based on a rising dollar.  Therefore, I’m watching it closely.

UUP

Moneyfair

Just a quick reminder that I’ll be speaking at the Biz Radio Moneyfair this Wednesday in Houston, Texas.  I’ll be speaking at 4:00 p.m. CST.  If you’d like to attend, just sign up here.

This post published at www.karleggerss.com

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4 Responses to “Investors Are Becoming More Selective”


  1. 1 jeff October 26, 2009 at 7:49 pm

    Karl,
    Fair value for S&P 500 is 860. Be careful! Love your blog and show. Just dont want to see you get hurt, 25% overvalued.
    Jeff
    ps- may take a couple of quarters. But we (US) have some slow growth coming for years and will look back at the bank’s profits, PE and understand that it was all smoke from free money.

    • 2 keggerss October 27, 2009 at 6:19 am

      Maybe I haven’t been clear in my posts but I believe we are renting this market for a while. The “smoke” from free money isn’t smoke. It’s actually helping these companies become more profitable. However, all this free money will be a problem going forward and it’s going to be a problem for stock prices eventually as well. I’m not sure how much the market is “overvalued”. I think it could be undervalued for the short-term based on too much free money. But, I’m not taking anything for granted.

  2. 3 Chris October 27, 2009 at 9:45 pm

    The ‘smoke’ that’s creating a falsified sense of security will eventually be referred to as the Turbo Boost the stock market needed. In otherwords the market will continue to leave people baffled while simultaneously creating quick opportunities to enter for those who are disciplined. Is this minor blip we’re encountering ‘the’ start to a possible 30% correction at most, or is this a small pause before approaching newer higher levels? The recent corrections or sideways movement we’ve been referring to were corrections, so is it possible this could be similar or will it take the course of a typical Nov & Dec in the market?

    • 4 keggerss October 29, 2009 at 1:35 pm

      I think the usual Sept./Oct. sell offs didn’t happen this year and maybe they are happening now but this sell off was about 6% just like the previous ones. I think we’ll ultimately go higher. I think a 30% selloff/crash will happen in 2010.


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