Now here’s a conundrum: The major stock market indexes have rallied nicely since year-end, with the S&P 500 up more than 7% so far in 2011. Yet surveys (like the weekly American Association of Individual Investors poll) show that mom and pop investors are growing more and more wary of the market.
The latest AAII figures, for example, had bears outnumbering bulls by 4.7%. In the Dec. 22 survey, bulls ran a whopping 46.9% ahead of bears.
A similar pattern has manifested itself in the options market. Back at the turn of the year, speculators were buying call options (a bet on rising share prices) much more aggressively than they are now.
Ordinarily, as a contrarian, I cheer when I see pessimism — or caution, at least — on the upswing. In this case, however, I believe the caution is warranted.
Why? Because the market’s “internals” have clearly deteriorated over the past four-and-a-half months. Fewer stocks are trading above their 10-week and 30-week average prices, an unhealthy divergence from the action of the Dow and other headline indexes. And fewer stocks are hitting new 52-week highs.
In short, the polls are simply tracking the market’s own increasingly ragged behavior.
Many defensive stocks continue to march ahead. This week, names like Duke Energy (NYSE: DUK), Johnson & Johnson (NYSE: JNJ), Kellogg (NYSE: K), Kimberly-Clark (NYSE: KMB), Eli Lilly (NYSE: LLY), McCormick (NYSE: MKC), Novartis (NYSE: NVS), Pepsico (NYSE: PEP), Pinnacle West (NYSE: PNW) and Procter & Gamble (NYSE: PG) all touched new 52-week highs.
However, it makes me uneasy that this “rush for safety” is occurring precisely when so many other stocks are lagging. I smell another fairly deep pullback coming — perhaps not quite as severe as April/July 2010, but likely on the order of 10% in the blue-chip indexes.
How should you prepare for it? Well, if you’re sitting on low-dividend or no-dividend stocks that have skyrocketed in the past year, you might do some selling. And since it’s Friday the 13th, I thought it appropriate to give you 13 unlucky stocks to sell:
- Altera (NASDAQ: ALTR)
- AutoNation (NYSE: AN)
- AutoZone (NYSE: AZO)
- Costco (NASDAQ: COST)
- Discover Financial Services (NYSE: DFS)
- Hormel Foods (NYSE: HRL)
- Limited (NYSE: LTD)
- Motorola Solutions (NYSE: MSI)
- National Semiconductor (NYSE: NSM)
- Priceline (NASDAQ: PCLN)
- Teradata (NYSE: TDC)
- Tiffany (NYSE: TIF)
- Whole Foods Markets (NASDAQ: WFM)
If you own them, thank your lucky stars for your current gains and sell them all before the next big pullback.
