Investors are well aware of the significant rally off the October lows. But lately they've also been hearing from financial commentators that "the easy money has been made." Rarely has a statement been as incorrect as that one. If you followed my columns and posts and purchased stocks in October, money has been made -- very good money at that. However, buying stocks last October when the market was in a free fall was anything but easy. It required a boatload of courage and conviction. In a market like this, there is no easy money. The explosive rally that began off the Oct. 9 low surprised even me. Although I had anticipated a tradable fourth-quarter rally, I expected a moderately lower bottom and a more gradual recovery. With such big gains under our belts in such a short period, what should investors do now?
Paring Back With Profits
My inclination is to trim some positions and to continue paring back positions into any further market strength. The stock market rarely collapses in the last month of the year. In fact, the two best months of the year on a seasonal basis are December and January. The market could easily work its way higher over the next 30 to 60 days, but the strong market recovery in the face of poor fundamentals such as disappointing profit growth and a weakening economy appears to be discounting some of the traditional seasonal strength. With big upward moves behind them, most stocks have lost the attractive valuations they enjoyed just eight weeks ago. Also, sentiment has turned very bullish very quickly. In many respects, this fourth-quarter rally resembled last year's. The market may not roll over tomorrow, but sustainable and material progress from these levels is unlikely. Which segments of the market appear most vulnerable? High-valuation sectors have the most downside risk, including most large-cap tech and media sectors, as well as many defensive sectors like staples and health care. Stocks with high price-to-earnings ratios are discounting growth rates that, for most companies, will not be achieved in a still-difficult profit environment.