Since the lows in March of 2020, the stock market has doubled. Think about that for a moment. The S&P 500 closed at 2,237 on March 23 of that year and closed Friday at 4,432 an incredible 100%+ gain in 17 months. Numerous reasons have been cited, including the incredibly loose monetary policy that has been in place for years but went nuclear when COVID-19 showed up in the winter of 2020. Toss in the Reddit WallStreetBets crowd, which had government hand-outs to trade with while locked down at home, and you had all the ingredients for the proverbial melt-up.
The truly scary situation for investors is that the market hasn’t had a 5% correction in almost a year, which is very unusual. However, the past two weeks and Monday’s rout may be the beginning of the long-awaited sell-off. The difficult question for investors is what to do now. We have warned for the past couple of months that stock prices were very overextended, and while all the ingredients are there to keep wind in the rally’s sales, it makes sense for more conservative investors to pivot to a safer stance.
If any one equity strategist across Wall Street has been right on the money over the past few years it is Stifel’s Barry Bannister. We have covered his outstanding and prescient calls for years, and generally when he talks, we listen. Those who did at the height of the sell-off in 2020 posted some massive gains.
Once again, Bannister sees storm clouds on the horizon, and with good reason. Everything from stocks to gold to Treasury debt to oil have been pushed higher. The meme stock traders from the WallStreetBets crowd have juiced the market volume higher, while hammering hedge funds with crowded short positions, and basically have become part of a new lexicon in the trading world.
Bannister remains concerned and feels that defensive positions are the best place to be now. While he was targeting a sell-off later in the year, one may be well underway now. Citing slowing liquidity, the potential for a continued drag on the economy from the COVID-19 variants and a host of additional negatives, it makes sense to take precautions now and make some moves before all the bids dry up, like they did back in 2020 in the first quarter.
Take Profits and Raise Cash
Take profits and raise cash positions, especially on high-flying momentum stocks. These often include technology, biotechnology and similar areas. The FAANG stocks are emblematic of this silo. During big sell-offs, these are the stocks that are the biggest casualties, because institutional accounts often have the biggest gains, and while they will not dump all their shares, they could easily part with a large position, especially if they face redemptions.
When taking profits, see if there are stocks in your portfolio that are down that could be replaced with better ideas, or rebought after 30 days to avoid a wash-sale rule penalty.
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