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Warning Signs Flash Even as Mr. Bull Celebrates a Birthday

Take a low-risk profile as the bull heads into a sixth year


What a ride!

Wall Street’s stampeding bull celebrates its fifth anniversary this week, with the benchmark S&P 500 stock index up 170% from its March 2009 low (even after Tuesday’s minor decline and today’s early losses).  We’re savoring our gains, too.  But we’re also keeping an eye out for signs that the party may be winding down.

So far, happily, none of the market’s internal evidence is pointing to a severe washout ahead.  The NYSE advance/decline line (the cumulative total of daily advancing stocks, minus decliners) just posted a new all-time high last Thursday.  It would be almost unheard-of for a major selloff to get under way without at least several months’ warning from a laggard A/D line.

At the same time, the pieces continue to fall into place for some kind of a top in the late April to early May window.  Insider selling, for example, has picked up again to a torrential pace.

Over the past eight weeks, according to the scorekeepers at Vickers, officers and directors of America’s publicly listed corporations have executed 6.7 sales of their own stock for every purchase—the most lopsided ratio in the past 10 years.  When insider selling rises to such a fever pitch, it nearly always foreshadows at least a pause in the market’s advance.

Another indicator I’m watching is the red-hot biotechnology sector.  Biotech stocks, neatly proxied by the iShares NASDAQ Biotechnology ETF (IBB), skyrocketed 65.6% last year, and have climbed another 14% so far in 2014.

However, this shooting star has faltered a bit in the past few days.  (See chart.)  If IBB starts to give ground in a big way, relative to the S&P 500, I would take it as a signal that the market’s “animal spirits” were flagging—and that a “correction” was at hand.

In coming weeks, should these caution signals continue to build, I may recommend some hedges for the active traders in our audience.  For now, I advise you to take a very low risk profile with new equity purchases.

If you’re low on cash, do some selling along the way so that you can take advantage of the broader buying opportunities I see emerging in late spring or early summer.

As an example, I’m selling Canadian Oil Sands (COSWF).  This producer of synthetic crude oil tosses off a hefty dividend, but costs are mounting rapidly, pinching the company’s cash flow.  (Cash flow per share dropped 14.7% in 2013, and the company is projecting further erosion this year.)

While I don’t expect a dividend cut anytime soon, the margin of safety here is too close for comfort—especially with oil prices looking toppy.  Let’s move to the sidelines.  Depending on when you purchased COSWF, you may have a loss or a small gain.

On the buy side, I’m still a fan of Verizon (VZ).  In recent weeks, a trickle of Wall Street analysts have upgraded the stock, citing the telecom carrier’s improved earnings visibility now that VZ has taken full ownership of Verizon Wireless.

I agree with that argument, but I’m more enamored, right now, with VZ’s generous (and secure) 4.5% dividend.  If the market hits a speed bump during the middle months of 2014, you’ll be glad to own a passel of low-volatility stocks that can cushion the jolt.


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