Markets Back In Familiar Territory

Who would have imagined?

Barely a month ago, Wall Street was wringing its hands over the threat of a China-induced collapse in the world economy.  Then, suddenly, the fears evaporated—and global stock markets soared.

Result:  We’re back in familiar territory, with the Standard & Poor’s 500 index closing Tuesday for a second session, and it remains just above the 2100 mark even after a move down this morning.

As you may recall, the all-time closing high was 2130.82, set on May 21.  We’re now only 1% off the peak.

Pretty amazing, when you consider that the bull has stampeded through a thicket of lackluster economic reports, from the punk September payrolls number (released October 2) to last Thursday’s downbeat preliminary estimate of Q3 gross domestic product (up at an annualized rate of only 1.5%).

The rampaging bull has also made hash of a number of bold, but totally misguided, forecasts by “momentum” gurus who simply extrapolated the August-September market weakness into the distant future.

Here’s my favorite quote, dated September 2, from a gentleman who gets the royal welcome every time he appears on CNBC:  “This is a very real bear market and I’m afraid that most people are not prepared at all for it….Rallies are to be sold.  End of discussion.”

The S&P is up a handsome 8.2% since then—almost an average year’s work in just nine weeks!

Beware of anybody who tells you the “discussion” has ended.  The debate over where the market is headed never ends.  Folks who pretend to have figured it out once and for all are charlatans, unworthy of your trust.

Even though the bearish forecasts were decidedly premature, there are good reasons for caution now that the market has rebounded.

As I’ve noted before, prices for junk bonds still haven’t surpassed their September 10 peak.  (Check out this graph of the largest junk bond ETF, iShares iBOXX High Yield Corporate Bond (HYG).

Meanwhile, the Dow Jones Industrial Average, S&P 500 Index and NASDAQ Composite have all exceeded their September highs by a wide margin.  This divergence between equities and the most-equity-like segment of the bond market suggests that problems are brewing beneath the economy’s seemingly tranquil surface.

Thus, while I’m not pressing the panic button and I do think the stock market rally is likely to carry through year-end (and into early 2016), I also believe now is an appropriate time to sift through your portfolio for stocks and mutual funds to sell.  In particular, you should be looking to weed out investments that appear to have exhausted most of their upside potential for the next 12 months or more.

On the sell side, I recommend selling Kimberly-Clark (KMB).  Since my initial recommendation in November 2010, the maker of Huggies and Kleenex has racked up a stunning total return of 145.6%.

Unfortunately though, KMB is now trading at 20X estimated year-ahead earnings, within a whisker of its highest P/E of the past decade.   That’s too rich for my blood.  Sell now and bank your well-deserved profit.

On the buy side, it was nice to see pipeline operator Kinder Morgan Inc. (KMI) rebounding strongly Tuesday, shaking off the latest poorly aimed salvo against the company by Barron’s.  Insiders have been lapping up the stock in recent days around current levels, with CEO Steven J. Kean purchasing nearly $500,000 worth.

Do you think he would throw away that kind of money if he believed Barron’s prediction that the shares might drop another 20%?

P.S.  Wild trading lately in AbbVie (ABBV).  After the panic induced two weeks ago by the FDA’s warning letter regarding ABBV’s hepatitis treatments, the drug company stepped forward with excellent Q3 earnings—and the stock has skyrocketed more than 37% from the October 22 panic low.

While others were tearing their hair out, we were buying.

The message: Keep calm and carry on!

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