With the recent market rally we find ourselves within 1% of the previous highs on the S&P 500 index. I am beginning to trim positions a bit here into the strength. I am fully aware that this move could backfire given that we are heading into a seasonally strong period for equities, but as we once again near the top of the trading range, I feel it is prudent to tread more carefully.
What have I been trimming exactly? A couple of areas. First, asset managers. These stocks have been strong with the market doing well. Since they track the overall direction of the indexes over the short term, they seem to be ripe for selling if I’m right and the market is closer to the end of the rally than the beginning of it.
I have also been selling much of the Coach (COH) stock that I alerted readers to in the $25 area. The stock has soared, along with other consumer discretionary names. At more than $33 per share, we’ve seen a 30% jump in a very short amount of time. The stock now trades at 20 times forward earnings, about in line with their projected 15-20 percent growth rate. While the stock is not overly expensive here, the value proposition that got my attention has largely been corrected with the recent rally.
All in all, I urge investors to tread carefully now that we have gained much of the losses back from July and August. I have a tough time justifying a 2007 target on the S&P 500 of more than 1,400 at this time. This leaves us with about 6% upside in that scenario. If that is the most I could miss by raising some cash here, I don’t think I’ll be doing anyone any great harm by shifting some funds away from equities and into more income-related securities.