Yes, stocks are rotating away from risk but does it mean anything?
On the surface the stock market isn’t going anywhere. The choppy daily action hardly moves the Standard & Poor’s 500 Index in a narrow range between 1088 and 1100. A “strong” rally like that of December 11 moves the index 4 points or 0.37%.
But beneath the surface the market continues its rotation away from the energy and financial sectors that led the rally until October. And toward healthcare, which started to move ahead in October, and utilities and telecom, which joined the leadership in November.
So what is the stock market trying to tell us?
A change like that from two sectors—energy and financials–that depend on prospects of strong economic growth to three that are classic defensive plays—with utilities and telecom stocks offering the additional security of relatively high dividend yields—is usually a sign that investors are getting nervous about a rally’s momentum, or stock valuations, or economic prospects. And sometimes all three.
But because it’s the end of the year at the end of a 65% rally from the March 2009 low, it’s hard to tell if this rotation signals some shift in risk tolerance and reward optimism or if it is simply a reflection of end of the year profit taking.
If it’s the former, it’s time to weight your portfolio toward those defensive sectors for 2010. If it’s the latter, there’s really no need to change your sector mix at all.
I’d say wait until next month to find out but next month is January when sectors that have been sold off at the end of the year typically outperform. So if energy and financials move ahead next month, investors still won’t know if stocks were showing a lasting rotation toward lower risk sectors or some not-terribly-meaningful end of the year profit taking.
Sorry but all my crystal ball says is Wait until February. Not much help in a confusing end of the year market, I’m afraid.
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Thank you for the identification of the relevant sectors we should be paying attention to. (5 is better than 10 or more sector possibilities)
So is the safe play to maintain a light allocation in the energy, and financial stocks, and a heavier allocation in healthcare, utilities and telecom sectors? Or an even allocation across the 5?
Clarification to my last post/questions:
I realize the time frames normally discussed are 12 to 18 months, but would it be a safe SHORT TERM (2 months) play to maintain …. or an even allocation across the 5 for the SHORT TERM?
Ohh Oh, time to sell everything??
Dec. 11 (Bloomberg) — Wall Street strategists, who redeemed themselves as equity prognosticators this year, are unanimous in expecting U.S. stocks to rise more next year after a nine-month rally.
DJBarber – I also expect U.S. stocks to rise more next year. I only wish I knew if it was going to be 1% or 30% !!!
go to cbs market watch.com and read mike santellis (sp) article from the barrons icon on top…the writer says 1200-1250 by mid jan and 1300 by march…then a 10% correction…who knows..most of us are heros today an dogs tomm…
Jim,
Yesterday you recommended AEP as a “buy” and listed 2 others as “possibles”. Would you please start the list of “possibles” on this page as you did on the MSN page? There was a list to the left of the screen below the portfolios which included the relevant stocks we should keep in mind.
Thanks.
Hi Jim
Could an alternate approach be to not worry so much about sector, but just pick stocks with proven performance and earnings and hope they pay a bit of yield…………
Its cold outside so utilities are a good play still.
Its Christmas so retail is a good play.
Gold will be a good play before June when they raise interest rates and loans become more prevalent.
Health care is making a run because the government is about to OK the plan or at least that’s the hype.
Telecom stocks if you don’t already own them, they are a weak play, but slightly profitable.