Take profits in the stock market?

Is it time to take profits in the stock market? That is the big question share market investors should be asking today. At the close of trading on Friday, 1 February 2013, the ASX 200 closed at 4,921, up 0.87% from Thursday’s close and up a staggering 24.3% since the 2012 closing low of 3,985 on 4 June 2012.

After such a stellar run, it is only prudent to ask whether or not this is a good time to take some money off the table and use it to restructure your share portfolio.

When looking at the drivers of this market performance and looking through some of the biggest companies on our market, it is clear to see that this rally has largely been fueled by a move into the two largest and most influential sectors of our index. Since the stock market low on 4 June 2012, most of the money has flowed into dividend rich financial stocks such as the banks and other financial sector companies. These dividend rich financial stocks, which are some of the largest companies on our exchange, have increased by some staggering amounts, especially when compared against their growth prospects.

Take a look at the four banks for instance. Commonwealth Bank (+30%), National Australia Bank (+27.2%), ANZ Bank (+28.1%) and Westpac Bank (+38.8%) have all outperformed the broader performance of the market by quite some margin since the middle of 2012. But it’s not just the banks that have joined the party. Other major financial sector companies like AMP (+43.2%), Platinum Asset Management (29.5+), Australian Securities Exchange (+24.9%), Insurance Australia Group (+56%) and IOOF Holdings (+57.3%) have blown this market higher from depressed levels. Not to mention that Australia’s two largest miners, BHP Billiton (+23.2%) and Rio Tinto (+27.2%) have played their part nicely by supporting the rise with market equivalent performances.

With numbers like these from the markets most influential members, as a technician, you’d have to be quite happy with the leadership shown by the blue chips.

So from a medium term perspective, things look pretty good. But as you should know by now, stock markets never rise in a straight line and the longer anything goes up in price without a break, the closer you are to that asset or market taking a breather. So the question should be asked, are we at that stage and if, so what should we do?

(Source: HUBB Integrated Investor)

By taking a simple look at the ASX 200 index, one clear indicator is screaming “Overbought”. According to the Relative Strength Index (RSI), a widely used technical indicator which is used to identify extreme periods of overbought and oversold conditions, the ASX 200, as of Friday, was more overbought than at any other time since 2006. The RSI, as it’s also known, indicates when a market may be approaching a turning point in the trend when it reaches a reading in excess of 70 as markets rise or below 30 when markets are falling. While it is notoriously bad at predicting the severity of any counter-trend move, it has a pretty good track record of predicting when a pause in the broader trend is likely to take place, as shown by the pink circles highlighted above on the chart. And right now, this indicator is suggesting that we are more likely than not at the start of such a period in time.

BUT, what about other markets we follow………..

Well if you look at the US stock market as shown below, a similar overbought condition is in place.

 (Source: HUBB Integrated Investor)

So what should you do? Well, that is a decision for you to make in conjunction with your adviser, but let’s be clear. The trend is up and mild corrective phases are very very healthy developments for any asset. These phases allow for markets to regroup and allow an ideal opportunity for investors to reposition their portfolios for the next move upward. It is in fact only when markets continue to rise without taking a rest that this price action can be unhealthy.

If you missed the first leg up over the past 6 months, don’t worry. The next phase of the rally tends to be the strongest and broadest, so there is still plenty of time to jump aboard. And if we do get the correction that the RSI is indicating, then you have a great opportunity to enter your next positions at very attractive levels with the added confidence that the funk that the ASX has been in over the past two years has likely completed and a new rally phase has probably just started.

Right now we’d suggest using the higher prices to trim positions that have done well, review positions that haven’t and reconsider their investment case. Once you have done that, be on the lookout for opportunities that were left behind in the first phase of the rally. It is often these sectors that underperformed the first phase of the rally that tend to outperform in the following phase, and right now…… we are seeing several sectors that are looking primed for a new move higher.

If you are looking for advice on how you can best position your portfolio to profit in the stock market, contacts us today for a No Cost, No Obligation consultation on 03 8657 7640 or email [email protected]. We would be more than happy to review your superannuation, trust or personal investment strategy and give you the advice you need for safer and more consistent return.

The information contained in this report is General in nature and has been prepared without taking into account your objectives, financial situation and needs.