Daily Gains Letter

Stock Market Flying High, but What About Risk?

By for Daily Gains Letter |


The performance of many blue chips—consumer staples stocks, in particular—is really stunning. And looking at the shares and how much they’ve moved on the stock market, even since the beginning of the year, you really have to wonder how sustainable this stock market rally is.

I am a big believer in blue chips and investing in stocks that pay growing dividends over time. But right now, we have so many companies trading right at their all-time record highs. I wouldn’t say that the stock market is expensively priced, but realistically, other than momentum players, would individual investors be buying these stocks at their all-time record highs? I find that unlikely.

The stock market breakout really is meaningful and pronounced. Consider The Procter & Gamble Company (NYSE/PG), which has been bid up approximately 16 points since last summer. Procter & Gamble’s stock chart is featured below:

Chart courtesy of www.StockCharts.com

The stock market is most definitely due for a break. The leadership from blue chips has been significant, but it also reveals the fragility and uncertainty in the marketplace. Institutional investors want to buy stocks, and they are; but they are buying the safest names.

For the stock market’s current momentum to continue, technology stocks are going to have to show more leadership going forward. Investors are buying in anticipation of a decent first-quarter earnings season.

Among the many blue chips that are soaring in this stock market, consider Johnson & Johnson (NYSE/JNJ). This stock has been rising consistently and strongly since the beginning of the year. Its performance is so unusual. It really is a powerhouse breakout. Johnson & Johnson’s recent stock chart is below:

Chart courtesy of www.StockCharts.com

Strength in blue chips is much less worrisome than in other sectors of the stock market. Biotechnology stocks have been extremely strong the last couple of years. Many old names in technology have been laggards.

I am not an advocate of individual investors buying this market, particularly those investors who are looking to accumulate a position or positions in blue chips for a long-term investment or who are saving for retirement.

In a sense, I might argue that the Federal Reserve has done its job or is doing its job. It’s re-inflating assets—financial assets—for better or for worse. The numbers show improvement in the housing market and private sector employment.

In any event, it’s extremely difficult to predict where the stock market is going to go. Considering the extensive run we’ve already had in blue chips since the beginning of the year, I think it’s fair to conclude that a meaningful correction would be a very healthy development for this stock market.

Frankly, I am amazed at the performance of stocks. I don’t think it will end badly near-term, but a major pullback in share prices would definitely go a long way to solidifying any chance for a more lasting trend. The one thing the stock market is not taking into consideration right now is risk. Risk is the other half of the equation that is lurking around the corner.

VN:F [1.9.22_1171]
Rating: 0.0/10 (0 votes cast)
VN:F [1.9.22_1171]
Rating: 0 (from 0 votes)

Tags: , , , , , , , , , ,