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How to Play Today’s All-Too-Familiar Market

Follow the smart money and sell your lukewarm picks


Sometimes the stock market is like driving around the block and coming back to the same place you started … again and again. Right now, I’m struck by the similarities to March 2012. The S&P 500 has risen in nine of the first 10 weeks of the New Year and the bulls are snorting wildly.

One of my favorite cheerleaders shouts that “U.S. stocks are the best value they’ve ever been during my investing lifetime.” (Better than in March 2009, when they were less than half today’s price? I’d like to meet his math teacher.) He predicts the market could rise another 95% over the next three years.

Meanwhile, amid the euphoria, the savvy insiders at America’s publicly traded businesses are dumping their companies’ stock at a rate seldom seen in market history. According to Vickers, the insider sell-buy ratio for all listed firms has averaged a spectacular 6.2 to 1 over the past eight weeks.

That’s even higher than last year at this time, when a ratio of 5.5 to 1 stopped the market’s advance cold.

Please note: I’m not some kind of apocalyptic prophet calling for a crash. However, there are so many signs of excess — the dumb money buying like crazy, the smart money selling with equal fervor — that I think we can fairly assume another 8% to 12% “correction” is coming soon for the headline stock indexes.Just like a year ago.

We’ve gone around the block again.

Our game plan? First of all, make sure you’re rid of any stocks or mutual funds you don’t really care to hold for the long term. Now is the time to sell, while the selling is good. The mob is begging for your shares; be kind and comply.

One that I’m waving good-bye to Novartis (NYSE:NVS). The Swiss drug maker has treated me and my Profitable Investing subscribers very hospitably indeed, rolling up a total return — price gain plus reinvested dividends — of 66.6% since our initial purchase in August 2007. Over the same period, the S&P 500 index has returned only 21.4%.

Unfortunately, Novartis’ profits have now plateaued. Earnings for 2013 were originally expected to remain essentially flat with 2012, when core EPS came in at $5.25, but analysts have recently revised expectations all the way down to $5.07 per share. That’s also significantly below core earnings of $5.57 in 2011.

Moreover, because of patent expirations, analysts project that NVS’ profits, over the next five years, will grow at a rate well below the industry norm. If you happen to own NVS, then now’s the time to let it go.

So, what should you do with the proceeds from your sales? I suggest funneling most of your new money into bonds — not stocks. For investors in the upper tax brackets, closed-end municipal bond funds are beginning to offer some very tempting yields.

One such name is BlackRock MuniHoldings Fund II (NYSE:MUE), which emphasizes high-quality paper. Over 98% of the fund’s bonds are rated in the top three categories by Standard & Poor’s. MUE also throws off an attractive 5.6% tax-exempt yield, equivalent to a taxable 9.3% for an investor in the top income bracket.

Take note, though, that MUE uses borrowed money to enhance returns. Leverage enhances your profits in rising markets, but can hurt when bond prices are falling. If the Federal Reserve were to back away from its zero-interest-rate policy, it would make sense to sell.

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.

Article printed from InvestorPlace Media,

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