Market on 13th Month of Rally

By George Leong, CFP, MBA — The Leong Side of the MarketcolumnThe bias towards stocks remains bullish, as the market continues on a 13-month rally. Yet, at the back of my mind, I feel a bit nervous that we really have yet to encounter a correction of any significant degree. This is not to say that stocks are overvalued, but I feel they are pretty fairly valued based on the current economic and earnings metrics. Unless there are fresh data that support additional gains, stocks could trade sideways in a tight channel in the upcoming months.
Unlike in early 2009, investors and traders are now looking for a reason to sell and take some profits. At the same time, there is also a feeling of not wanting to miss out on more potential upside opportunities. Option traders could use Call options to play potential gains while taking some profits on current stock positions. In this way, you can manage the risk.President Obama’s economic stimulus plan has worked, but many programs are coming to an end in such areas as housing. It will be interesting to see how this impacts the recovery in housing.The market will continue to need leadership to have any chance of advancing higher. The banking sector is looking more positive and could drive the buying, as there is some confidence surfacing towards America’s financial structure. I feel that technology will also provide leadership.Yet you need to be careful, as there remains market risk. Investment guru Warren Buffett continues to be somewhat cautious towards the U.S. economy.

The near-term technical picture is bullish, with good relative strength. Investor sentiment continues to be extremely bullish and this will help add support. At this point, about 86% of all U.S. stocks are above the 200-day moving average, up from 83% a month ago. The same goes for the shorter-term moving averages. Think back a year and less than 10% of U.S. stocks were above their respective short and long-term moving averages.

It is great to be long in this market, but do not get too aggressive. I believe a prudent approach would be to ride the rally and continue to look for investing and trading opportunities. Take some profits on some of your bigger winners.

A key is to enter smaller positions; so, if you are wrong, the loss would not be damaging to your trading base. If the tide turns, make sure you are not tied emotionally to the stock and instead sell it.

Remember: Bulls make money; Bears make money; Pigs get slaughtered.