by Traders Reserve | February 13, 2014 10:08 am
If you thought the 6% pullback in the market was stressful , just wait to see what’s in store over the next month or so.
By now you’ve probably seen that “scary” market chart that compares today’s market to that of 1929. The chart, produced by Tom McClellan of the McClellan Market Report, shows market movement from July 2012 to today, overlayed on a chart of the market for the months before October 1929. The eerie similarities seem to predict a 1929 style crash to occur in March or April.
In looking at the picture, it would be hard to argue with that conclusion. The two parallels are uncanny and include — you guessed it — a pullback in the market similar to what we just witnessed followed by a brief spike higher.
Then it’s down she goes and down she goes hard!
I’m reluctant to take this chart too seriously, but considering the parallels continued after I first saw it in November, it is a bit spooky.
Rationally speaking there is nothing about today that is remotely similar to 1929. We have more transparency, liquidity, and regulations in place to protect against a crash similar to what transpired then.
But, you can’t argue with the chart.
Or can you?
I can make up a chart to look pretty much like anything I want it to look like. To draw conclusions from such fanciful artwork would be foolhardy.
Even understanding the nonsensical nature of comparing today to 1929, I can’t help to be a bit concerned.
I won’t go nuts suggesting everyone pull out of all stock positions and put the cash in mattresses, but I will say that it is always a good idea to shed your portfolio of stocks that are overvalued.
So with that in mind, here are three stocks to sell that I would jettison immediately before we are hit by a 1929-style crash:
If the market were to crash as it did in 1929, fashion casino stocks like MGM Resorts (MGM) would be hit hard. Imagine the loss of wealth in this country should such an event reoccur. There would be mass unemployment. Trips to Vegas would end rapidly. About the only business safe to own would be the funeral parlors that would ramp up sales thanks to those invested in Wall Street choosing to end it all. Those same people are those most likely to go to an MGM resort today.
All kidding aside, MGM is a stock to sell with or without a crash coming. The stock has had a nice run, but is very expensive today. Analysts expect the company to make 23 cents per share in 2014. At current prices MGM trades for more than 100 times that number. No, thank you. I’m not paying that price if there is a market crash coming. This one could lose 90% of its value in such an environment.
You know it’s cute that this little upstart Internet radio company Pandora (P) chose a one-letter ticker, but I’m not impressed. It used to be one-letter tickers were meant for the industrial giants – the best of the best, like U.S. Steel (X). Instead this one-letter wonder is a bit fraudulent if you ask me.
While online radio has seen impressive growth with the company figuring out how to monetize that audience with advertising, the stock is quite vulnerable to a pullback. For starters, if Apple (AAPL) ever got serious about competing with these guys, the game would be over for Pandora. They are on a very short leash and if a market drop is in the cards, this is one to sell in advance. Analysts expect the company to grow profits by nearly 200% in 2014, but the stock trades for 77 times 2014 estimated earnings. That’s simply too much, no matter how impressive perceived growth is in the near term. As I said longer term, I do not see a viable Pandora.
Electric car maker Tesla (TSLA) had all the momentum in 2013. That was when the chart comparison to 1929 signaled smooth sailing. It was just that for Tesla until a series of car fires took the wind out of the sails. As if on cue, the company has rebounded from that PR hit.
Now the stock is near its all-time high. That’s not a good place to be if the market is going to crash. Don’t get me wrong, I like the idea of Tesla, but I just wouldn’t own the stock today. Shares are quite expensive relative to expected profit growth. Analysts expect the company to grow profits by 156% in 2014, but trade for 124 times 2014 estimated earnings. That’s too steep and quite risk if the chart overlay to 1929 proves correct.
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