Wednesday, July 18, 2012

Reduce U.S. Stock Holdings

As a highly price-sensitive investor, I am taking profits as the S & P 500 has risen 7% in less than two months.  A number of stocks that I had identified as potential buys have rebounded 10-20% during this time, and I refuse to chase them.  If this summer rally continues, I will generally watch it and enjoy tennis and other summer activities.

There are exceptions.  Today I bought a stock that has fallen 21% this month in a sector that has excellent long-term prospects (agriculture).  There are a handful of other stocks of quality companies that are still reasonably priced.  

But with the VIX index at 16, the lowest level in a year, a more cautious approach is appropriate.  The VXX exchange-traded note based on the VIX is worth accumulating over the next several weeks.  After all, stocks have rebounded, complacency seems widespread, and the historically negative market months of September and October are not far off.

One equity market remains historically quite undervalued--Europe.  But with the possibility of a sharp decline in the Euro versus the U.S. dollar, the currency risk of European equities is significant for U.S.-based investors.  If the Euro does fall sharply, the competitiveness of European companies would be much better, and they would likely then represent outstanding long-term values.

But for now, greater caution toward the U.S. equity market is appropriate.

Steve Lehman

S & P 500:  1375

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