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Marc Cuniberti: Rotation or rout in the making

Marc Cuniberti
Columnist

In recent weeks one could argue the markets have for the most part slowed their eye-popping and relentless ascent that became the norm since about the third week of March.

Investors may be seeing little definitive movement in the Dow but the same cannot be said for their portfolio balances. A classic rotation has been taking place with some analysts arguing a speculative bubble in particular stocks has popped.

Without singling out any specific names, I’ll just say some stocks have gone crazy up, with valuations (the price of the stock versus what the underlying company earns) bordering on the mania phase. One needs only to think back to the dot.com bubble to envision what stock manias look like. Indeed, most will agree the last three months or so has seen similar stratospheric price rises in many stocks.

When stocks gain 50, 75 or 100% in a few weeks, you’re in a stock mania — and manias, when they end, usually take at least some of the gain and turn it into stomach churning pain. So goes the last few weeks for some stocks and the investors that bought them.

A classic rotation has been taking place with some analysts arguing a speculative bubble in particular stocks has popped.

Since the Dow itself has not rapidly deflated as a whole as has happened in the past, these last few weeks is not an all-out rout of the markets, at least not yet.

More so what we’re seeing are the previous shooting stars of the shutdown falling back to Earth, and since many of these stocks were the popular household names we all know of and love, it’s more than likely few investors avoided some portfolio bloodletting.

The question now is will the rotation become an all-encompassing market blow out? Or will the rotation only deflate some stocks with those monies going into a whole new group of sectors?

The market has indeed been in somewhat of a disconnect of late, with many stocks and indexes reaching or surpassing all-time highs. All this while the economy remains in partial shutdown, likely causing many businesses of all sizes to close their doors for good. If many businesses do shut down for good, and this analyst thinks a good many will, the damage to the economy will be massive.

Most experts believe the Fed bailouts and stimulus programs can only go so far in rescuing the economy. Real growth has to be of the organic type, which means real businesses selling real stuff.

The concern is that the market has not fully accounted for just how much damage there will be. As more economic statistics are reported, reality might bite the markets more than they are now. Add to that a contentious election, wildfires in the west and who knows what waiting in the wings, to expect the market to continue its explosive rally may be asking a lot.

As we move into fall, analysts remember that when the leaves fall, markets have fallen in the past, with some historic crashes happening in the months of September and October.

Some good advice might be to take some money off the table where gains have been made. An old Wall Street adage addresses this quite nicely: “No one ever went broke taking a profit”.

And lightening up on equities and going to more cash smooths out volatility and reduces risk in a portfolio. Indeed, going to more cash is a favorite of mine when looking at healthy profits while fretting over iffy markets. Trying to squeeze more profits from an already profitable position means the greed gene is alive kicking. Although this can yield fields of dreams, it can also lead to nightmares if taken too far.

Marc Cuniberti is an investor advisor representative of Vantage Financial Group, a registered financial advisor in the state of California. The opinions expressed are those of Mr. Cuniberti and may not reflect those of this publication or Vantage Financial. Insurance products are from Mr. Cuniberti and not affiliated with Vantage. California Insurance License #0L34249. Investing involves risk and you can lose Suite #1, Auburn.


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