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Let This Overheated Market Come to You

The rally isn't dead, but it'll have pullbacks you can exploit


I’m no expert on climate change in the meteorological sense. But stock markets around the world, from New York to Shanghai, are sizzling this January. So much so that a spell of “global cooling” probably isn’t far off.

This is, of course, just the opposite of what you’re hearing from the talking heads on cable TV. Even grizzly bear Alan Abelson of Barron’s, who seldom has an encouraging word for stocks, has now changed his tune (slightly). Abelson is counseling investors to let their equity profits run “until they start to go the other way.”

Don’t Get Greedy

I’ll be the first to agree that an overheated market can continue to get even hotter — far hotter than any reasonable observer might expect. However, even if the marquee U.S. stock indexes do break out to all-time highs later this year (a strong possibility, in my view), meaningful pullbacks will occur along the way.

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Virtually all of the market indicators I track for my Profitable Investing service are suggesting that stock prices, both here and abroad, are bumping up against a temporary ceiling.

For example, the number of NYSE common stocks trading above their 10-week moving averages recently peaked at 86.8% (a very overextended reading) on Jan. 22. Since then, this gauge has begun a gentle decline, even as the S&P 500 and other headline indexes have edged higher.

Subtle divergences like this typically occur just ahead of a market dip. While I doubt the S&P will backtrack more than 3% to 4% in February, many individual stocks are likely drop two or three times as much. If you’re looking to put cash to work, you’ll be rewarded for letting the market come to you.

Look to Foreign Currencies for Opportunity

Elsewhere in global markets, India’s central bank on Tuesday shaved its benchmark lending rate by a quarter-point, to 7.75%. It was the first rate cut since last April. The Reserve Bank also forecast that India’s wholesale inflation rate would fall to 6.8% by the end of the fiscal year (ends March 31), a welcome downshift from 7.5% projected earlier.

The rupee advanced slightly on the news. However, I wouldn’t be surprised if the Indian currency dipped (against the dollar) over the next couple of weeks. Interest rate cuts usually lead to a flurry of selling in the currency concerned.

Buying WisdomTree Indian Rupee Fund (NYSE:ICN), once it dips to an attractive level, is the best way I see to take advantage of this trend.

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.

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