Why It’s Time to Cull Your Stocks

Still Buying Stocks StopGood numbers are one thing, but stocks did go up in advance of what’s turning out to be a fairly decent earnings season.

It’s not unreasonable at all to expect the market to take a solid break, perhaps for the next two to three months. Of course, predicting corrections and/or consolidations among stocks is a difficult endeavor in an era of extreme monetary stimulus. The Federal Reserve is slowly chipping it away, but it remains very committed to helping capital markets, especially as the economic data continues to be pretty soft.

Stocks are still looking stretched and this market is tired. A 10% to 20% correction would be a healthy development for the longer-run trend. Stocks need a catalyst for this to happen. It could come out of nowhere, and I’m reluctant to be a buyer with so many positions trading at record-highs.

Johnson Controls, Inc. (JCI), a large U.S. auto parts manufacturer, had a modestly positive third fiscal quarter with sales growing three percent to $10.8 billion due to more sales in China.

The company had some one-time restructuring charges during the quarter. Earnings per share from continuing operations (excluding restructuring and one-time items) grew a hefty 17% to $0.84. Management confirmed its full-year guidance, which pleased the Street, but the position is breaking down a bit.

E. I. du Pont de Nemours and Company’s (DD) numbers were uninspiring and the company tried to keep investors interested with a four-percent increase to its quarterly dividend. The position’s starting to roll over and with agriculture being such an important part of the company’s business, changing preferences among farmers hurt its most recent quarter.

Given current information, a major correction would be a buying opportunity. It would take a lot of froth out of richly priced stocks, which include a lot of blue chips now.

Generally speaking, I would not be buying this market. I would be waiting for a more opportune time to consider buying. It might even be time to take some money from winning positions off the table; investment risk goes up commensurately with rising share prices.

Corporate balance sheets remain in excellent shape, and so are the prospects for share repurchases and increasing dividends. (See “Why This Company’s a Solid Pick for Any Long-Term Portfolio.”)

The fundamental backdrop for corporate earnings growth remains intact.

The one key indicator to watch is the Dow Jones Transportation Average, which led stocks higher since the beginning of 2013.

Practically, the broader market isn’t likely to break down without participation from transportation stocks. If this index breaks below 8,000, then the likelihood of a correction significantly increases.

This market has come so far in a short period of time and the Federal Reserve has been it’s strongest supporter. But while second-quarter earnings are fairly good, everything looks tired now and it won’t take much for institutional investors to hit the “sell” button.

All stocks are risky securities and that even applies to dividend-paying blue chips. It’s time to re-evaluate portfolios and all positions for exposure to risk. An increased weighting towards cash wouldn’t be unreasonable.