Why It’s Not Time to Sell Stocks Yet (Despite Markets’ Record-Highs)

Not Time to Sell StocksThe stock market continues to ride higher as we approach the 15th anniversary of the high of the NASDAQ, prior to the subsequent sell-off that drove sellers to the exits in a frantic dash.

The situation looks different this time around, but you have to wonder about the rapid ascent of the stock market in February after the negative January. The advance in the stock market this month should not be a surprise, given the historical record shows the S&P 500 edging higher each February in the majority of the last decade. But my concern is that I just cannot believe the stock market will continue to rise higher to new records unabated. This is simply not realistic.

Having said that, it’s not quite time to sell off all your stocks yet.

Main Stock Indices Rising in February After Slow January

The buying in the stock market this month has been broadly based buying, from small-caps to large-caps to blue chips. The S&P 500, NASDAQ, DOW, and Russell 2000 have risen more than five percent in the month, and technology continues to be strong, with the NASDAQ within about 100 points of 5,000.

Nasdaq Composite Chart

Chart courtesy of www.StockCharts.com

In February 2014, following a negative January, the NASDAQ advanced five percent, while the S&P 500 and Russell 2000 each gained more than four percent. We are witnessing a similar pattern in the stock market this year.

At the start of the year, I thought the S&P 500 could trade up 10% to around 2,250, or even 2,300 if the global economy stabilized. My estimate for the stock market could still play out, but much will largely depend on the direction of oil prices and the situations in the eurozone and China.

Time to Sell U.S. Stocks?

Famed economist Robert Shiller told CNBC that he was looking at shifting his capital away from U.S. stocks and into Europe, due to a cheaper relative valuation across the Atlantic Ocean.

While what Shiller is suggesting makes sense, I would not be vaulting completely out of domestic stocks. Instead, I’d consider taking some money off the table if the stock market continues to move higher without any sort of adjustment.

The major concern here is when and how much the Federal Reserve will begin to raise interest rates. My feeling is that the central bank will likely increase rates by 25 basis points by sometime in the middle of the year to gage the market’s response.

We are already seeing mortgage rates rising. The result has been a decline in mortgage applications by 13.2% for the week ended February 13, according to the Mortgage Bankers Association. While it’s something to watch, mortgage rates are still at a rate less than where they were a year earlier. Both housing starts and building permits were over one million units on an annualized basis in January, but they were down sequentially versus December.

You also need to watch the 10-year bond yield, which has risen to above two percent. Higher yields impact the choice for investors between investing in the stock market or bonds. But unless the bond yields surge higher, towards three percent, I feel investors will continue to buy stocks, especially when you can pick up tax-favored dividend-paying stocks yielding more than what you earn on the 10-year bond; plus, you still get the opportunity of capital appreciation with the stock market.

10 Year Treasury Note Yield Chart

Chart courtesy of www.StockCharts.com

The Best Investment Strategy Right Now?

Ultimately, riding the gains but taking some profits along the way still makes the best sense in this stock market.