The Dow has managed to work its way up the ladder to a 1,000-point advance since the beginning of the year.
But don’t get too comfy in your chair. Beneath the surface, the mojo that lifted the blue chips to a four-year high last week is gradually dissipating.
How do I know? One of the simplest — and most reliable — gauges of the market’s internal health is the number of individual NYSE issues touching new 52-week highs. This indicator actually peaked almost two years ago, on April 26, 2010, when 674 Big Board stocks achieved new highs for the year.
During the bull’s second big charge of the current cycle, we got a maximum of 365 new highs on Feb. 17, 2011. That was a far cry from the first peak (365 versus 674), and it was a sign of gathering weakness. A little more than two months later, the market stumbled into a “correction” almost 20% deep.
Now comes the really unnerving news. Last Thursday, when the Dow struck a new high for the bull market that began in March 2009, only 112 NYSE issues followed suit with new 52-week highs of their own. It was the tiniest group of individual highs at any 52-week high for the market since the top of the Internet bubble in March 2000.
Such narrow advances aren’t healthy. They’re similar to a plaque-induced narrowing of your arteries. In most cases, you can keep going (and even live pretty normally) for a while. Eventually, though, there will be a nasty price to pay.
I don’t think we’re on the verge of another breakdown like that of May-October 2011. Not yet, anyway. However, the risks are clearly rising. This is a time to be extremely careful about the stocks you buy — and keep.
I certainly wouldn’t chase the names that have climbed the most in the opening weeks of 2012 (techs and banks, for example). While I’m delighted that Apple (NASDAQ:AAPL) has belatedly decided to “share the wealth” via a dividend and share buybacks, the stock has already zoomed 49.6% since the turn of the year, with some analysts suggesting an even greater long-term run-up. I’m confident you’ll get a safer opportunity to purchase AAPL, at lower prices, during late spring or summer.
On the other hand, I’m finding some excellent values in the energy sector. Despite strong oil prices, which are boosting profits for companies with well-managed exploration and production businesses, energy stocks have lagged the broader S&P 500 index year-to-date.
Of the two, OXY packs more near-term capital gains potential, while RDS.B — with its rich 4.7% dividend — offers a steadier share price (less susceptible to market downdrafts).