It’s funny how, in this business, you often seem to be watching a movie you’ve seen before—sometimes long, long ago. The current frenzy over technology stocks is a case in point. Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX), Priceline (NASDAQ:PCLN) and Salesforce (NYSE:CRM) have all soared more than 50% so far in 2012.
What’s more, over the past few days, two analysts in the “manic bull” camp have upped their price projections for AAPL to $1,000 a share. Ah, we forget so quickly! It was just this sort of bidding war that marked the top of the great technology blow off of late 1999 and early 2000.
I’m not saying AAPL can’t go higher than it is today. It certainly can, on pure follow-the-crowd momentum.
However, if basic economic theory (i.e., common sense) still works, Apple’s enormous profit margins can’t—and won’t—last forever. Other players will find ways to compete with Apple products, if not on cutting-edge design and marketing, at least on price. Apple may remain a great business for many years to come, but its profits (and its share price) almost certainly won’t continue to grow at the pace we’ve seen over the past two quarters.
For investors in the broader market, the tech hype, which largely resolves into Apple hype, is significant for another reason. As in 1999 and early 2000, prodigious strength in a handful of tech stocks is masking deterioration elsewhere.
So far, the signs are rather subtle –too subtle for us to push the panic button just yet. But they’re troubling nonetheless.
Monday, for example, the S&P 500 index closed at a fresh 52-week high for the tenth time in 2012, a glorious accomplishment so early in the year. Look under the surface, though.
Over the 10 sessions leading up to Monday’s high, an average of only 95 NYSE stocks per day touched new 52-week highs of their own. That compares with 202 in early February, 293 in February 2011 and 421 in April 2010.
In fact, you would have to go back to the confused, conflicted, contradictory and doomed market top of March 2000 to find so few individual issues ushering the S&P to a new 52-week high.
As I said earlier, I’m not ready to pull the alarm cord quite yet. Market momentum can carry further than almost any reasonable observer would imagine. Still, I do think this is a time for extra caution with new purchases, and for defensive measures with respect to your existing holdings.
In our model portfolio, I’ve decided to let go of J.P. Morgan (NYSE:JPM). Morgan is one of the best-run of the banking behemoths, and I have great respect for the wisdom and integrity of CEO Jamie Dimon.
However, the stock is volatile. Pleasantly so, over the past five months, of course—JPM has leaped 63% from its November low. But we learned, again, last summer how rapidly Morgan (and other bank shares) can decline in a bad market.
What about Bank of New York Mellon (NYSE:BK), and First Niagara (NASDAQ:FNFG)? Hold them for now. Over a two or three-year horizon, these two probably have more upside potential than the banks we’re selling.
On the buy side, I’m increasingly drawn to the rich value in the oils. Changes in the global demand structure (growing energy consumption by emerging countries) will likely keep crude prices high, by historical standards, for many years to come. Efficient producers stand to reap a profit bonanza.
I’m upgrading Royal Dutch Shell (NYSE:RDS.B). Boasting a safe 4.7% dividend and excellent prospects for production growth over the next few years, RDS.B furnishes the perfect combination of defense and offense that we’re looking for in the current environment.