The most difficult decision in equity investing is the determination of when to sell a holding.There are many different things to consider not the least of which is the current value of the company and the future direction of the stock market as a whole.
Indeed, during the last twelve months, many of our stock selections have done very well and have more than achieved our short term target prices.
In fact, some of these fine companies may continue to advance during the next few months. However, some things are becoming very obvious to us. At least on a short term basis, some our recommendations are now fully valued.
In addition, there are many different things about the future direction of the current stock market that give us more than enough reason to pause.
In the last few weeks, there have been riots in the streets in several countries in the Middle East. There has been regime change in Egypt. The increasing cost of food and price inflation is a major concern in many of the emerging markets including the Middle East.
Meanwhile, major international companies like Pepsico, and Kraft have noted that the increasing cost of making their products are beginning to squeeze their profit margins and both companies have reduced their growth outlooks and predict more inflation ahead.
Of course, there is also the current debt problem in many of the European countries, the recent rise of interest rates in China and the ongoing deficit and unemployment problems in the United States.
In fact, the United States high unemployment rate and the need for economic stimulus is why the Federal Reserve is running a program called QE2 (Quantitative Easing 2) . The central bank creates money which it uses to buy government bonds and other financial assets, in order to increase the money supply and the excess reserves of the banking system; this also raises the prices of the financial assets bought which lowers their yield.
So, QE2 is an economic stimulus program sponsored by the Fed which leads to increasing price inflation against a backdrop of artificially low interest rates. As a result, the Dow Jones 500 stock index is up nearly 25% in just the last six months. Indeed, the recent stock markets rise has been parabolic and cannot last. It is a stock market on a sugar high with its stimulus program ending in June.
Market seasonality is another issues which makes us nervous for the market going forward. A look at the performance of the Dow Jones Industrial Average over the 59-year period through 2009 shows that the index produced an average gain of 0.4% during the six-month periods from May to October, according to the 2010 Stock Traders Almanac. Over the same 59 years, the Dow averaged a 7.4% gain during the six-month periods from November through April.
To put it another way, $10,000 invested in the Dow during each of the May-through-October periods beginning in 1950 would have generated a cumulative total loss of $474. But $10,000 invested in the index only during the November-through-April periods would have generated a total return of $534,348.
Of course, these type of historic returns based on seasonality have led to the slogan often heard on Wall Street to, "sell in May and go away". The recent dramatic rise in the stock market, growing price inflation along with rising future interest rates and with the end of the Fed quantitative easing scheduled for June has given us reasons to pause. Yet, another slogan may be well advised for the stock market in February 2011.
Before the market prices equities for the end of the current Fed easing - QE2- or the next international or economic crisis, the prudent course of action may well be to "Sell today and not in May". That is exactly what we intend to do with several of our portfolio holdings on Monday morning.
The following is a list of limit orders of eWorldvu portfolio holdings that are being sold at the open on Monday February 14, 2011. (You could also consider writing covered calls expiring in October/November on these stocks).
Model Growth
Shares Stock % Gain Price Reason
507 GE 32% Over 21 Fully Valued short term
301 Flr 54% Over 73 Fully valued short term
300 Celg -8% Over 51.50 New cancer side effects for lead drug/Recent merger ill advised.
200 Phys 22% Over 12 Fully valued short term
Model Retirement
Shares Stock % Gain Sell Price Reason
507 GE 32% Over 21 Fully valued short term
305 NEE 2% Over 52.75 Better values in utility sector
203 Vod 34% Over 29 Fully valued short term
203 ADP 17% Over 49 Fully valued short term
200 Phys 22% Over 12 Fully valued short term
As always, do your own due diligence prior to investing. Risk tolerance is different for each investor. The information in this article is the opinion of the author. Members of eWorldvu may have a position in some or all of the securities listed above. eWorldvu is not responsible for any gains or losses on any security or investment.
Also see:
Investing For An Era Of Stagflation
Sale Prices of Portfolio Holdings:
GE 21.51
Flr 73.45
NEE 54.99
Phys 12.27
Vod 29.01
ADP 49.63
Celg 51.89
GE 21.51
Flr 73.45
NEE 54.99
Phys 12.27
Vod 29.01
ADP 49.63
Celg 51.89
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