It’s spooky. The stock market is now so overbought that there are almost no bargains left. Insider selling has swelled to a thunderous cascade (6.3 sells for every buy) unequaled in the past eight years. Yet the popular equity indices continue to float aloft — effortlessly, it seems — on a puff of free money from the Federal Reserve. The S&P 500 Index closed Tuesday an eyelash below its all-time high, set in October 2007.
Have the laws of gravity been repealed? Does Bernanke’s abracadabra trump everything?
You might be forgiven for thinking so. However, we’ve witnessed this type of “perfect” investment climate before — in late 1999 and early 2000 — and it ended up being not so perfect after all. Beware of illusions!
I’m most concerned when I see the rich price tags investors are placing on some rather ordinary businesses. I’ve long been a fan of consumer staples stocks: companies that make food, beverages, soaps and other necessities of life.
In recent months, investors — perhaps sensing that the market is overextended and risky — have thronged into these names. As a result, a stock like Campbell Soup (NYSE:CPB) has soared more than 41% from last June’s low. Kimberly-Clark (NYSE:KMB), which makes Kleenex and Huggies, has jumped nearly 33% from its 52-week low.
Both stocks are past picks from my Profitable Investing Incredible Dividend Machine portfolio. If you’re holding them in a taxable account, you might as well keep them. (I’ve designated them as Standby holdings.)
If you own them in a retirement account, though, I suggest selling now with an eye to buying back at lower prices during the late spring or early summer months. When the inevitable “correction” comes, it will dent these darlings along with everything else.
In fact, you might be surprised how sharply they decline. Overpriced merchandise doesn’t provide a lot of protection in a falling market.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk “value” approach has won seven “Best Financial Advisory” awards from the Newsletter and Electronic Publishers Foundation.