Former Momentum Stocks Signpost to Sell?

Price Momentum Suggests Portfolio RebalancingA good amount of speculative fervor has come out of this market so far this year, but there’s still quite a bit of valuation froth around.

Across the board, 3D-printer stocks have come back. 3D Systems Corporation (DDD) still boasts a trailing price-to-earnings (P/E) ratio of around 150.

Tesla Motors, Inc. (TSLA) is still going strong. It’s one of few super-hyped stocks that made a strong recovery in January after a material sell-off months before. (See “Buy High, Sell Higher: Top Investment Strategy for Buoyant Markets?”) The position just bounced off $265.00 per share. Next year, Wall Street estimates the company will do more than $5.0 billion in sales.

Looking at the stock market currently, there’s a lot of indecisiveness and geopolitical events are overshadowing the action.

Watch large-cap biotechnology stocks (or the NASDAQ Biotechnology Index) for their trading action specifically. This group of stocks reaccelerated strongly in February and is very much overdue for a material correction.

I’ve noticed several key momentum stocks within the group have started rolling over. This should be a strong contributing indicator to the short-term action unrelated to specific events happening in Ukraine.

Gold is holding up well with the geopolitical tensions, and oil prices are too, but to a lesser degree.

Stocks are due for a break. What looked like the makings of a material correction in January, equities reversed direction after the Federal Reserve, once again, reiterated its willingness to be highly accommodative to capital markets.

This kind of market (after such a strong 2013 for stocks) warrants a significant degree of caution. I wouldn’t be jumping onto any bandwagons. If anything, I’d be thinking about taking some money off the table, especially from speculative positions.

Stocks are likely to continue being choppy near-term. Sell in May and go away is the old adage that just might play itself out once again.

The outlook for dividends and share buybacks still remains solid, so blue chips are less vulnerable. But so many groups of stocks have run so strong and are highly valued that they are very much due for a haircut.

Catalysts for a correction in stocks come and go, and investor sentiment is still buoyed by the Federal Reserve. But the unpredictability of geopolitical events combined with trading action that’s tired, choppy, and without conviction makes the current environment high-risk for new positions.

The NASDAQ Composite has been outperforming the other major indices over the last several months, and a turn in this trend would definitely signal a change in sentiment among institutional investors. It’s worth watching for this dynamic.

Stocks have been due for a material price correction for quite some time, and they’ve shown a resilience that can only be attributed to expansive monetary policy and—to a much lesser degree—a slight improvement in economic and corporate data.

A complete and total rebalancing of equity portfolios is worth thinking about now and so is portfolio risk.

Investment risk for speculative positions is going up. A reduction in the portfolio weighting allocated to risk-capital positions is now appropriate.