In January, the talking heads foretold recession.
Now, the S&P 500 is on the verge of setting a new all-time high, oil has closed above $50 for the first time since last July, and thanks to the sinking U.S. dollar, gold may actually breach the $1,300 barrier this month.
But as stocks approach overbought levels, can the good times last? And more importantly, where do we go from here?
While I won’t pretend to know exactly what the future holds, here are three ways to prepare your portfolio for whatever lies ahead…
1. Take Some Money Off the Table
If you were brave enough to buy dips in stocks at the January and February levels, you’ve likely been rewarded with some handsome gains.
And if you’re one of these fortunate folks, you might consider booking some profits and raising some “dry powder.”
Longtime readers know that I don’t put much stock in the “Sell in May and Go Away” adage.
But I do encourage keeping cash on hand to take advantage of opportunities as they present themselves.
And history is telling us to expect one such window to open up soon…
Over the last 10 years, the S&P 500 Index has averaged a decline of 1.31% during the month of June, excluding dividends. And June’s losses are back-loaded in the second half.
From June 16 to June 30 in the last 10 years, the large-cap index has fallen 0.91% on average versus a 0.28% decline in the first half of the month.
Fast-forward to the July medians, when the index gained 1.13% on average since 2005, and the verdict is clear: It’s time to free up some capital for the end-of-June “stock sale.”
2. Load Up Your Watch List
Louis Pasteur once famously said, “Chance only favors the prepared mind.”
In the context of investing, the better prepared you are ahead of buying opportunities, the more successful you’re bound to be.
I always encourage investors to keep an up-to-date watch list of at least 10 to 15 stocks, across multiple sectors, at all times. So when the market dips, you’re already in a position to strike.
As a chartist, I primarily use a stock’s chart to guide my entries and price targets for trades.
But if you’re a fundamental investor, then you should know your target stocks’ historical valuations inside and out.
This way, you know what a deal actually looks like on a stock, from a value perspective.
Take, for instance, Apple Inc. (AAPL).
After several years of rip-roaring gains, Apple’s stock has declined 23% in the last year, and its price-to-earnings ratio fell below its five-year average in late 2015.
In fact, Apple’s price-to-earnings ratio fell last month to a three-year low. It’s trading at a discount to its five-year price-to-book and price-to-sales ratios, too.
This is the kind of sale for which you’ll want to keep an eye out.
And when the market falls broadly – like it soon may – many brand-name stocks will be suddenly marked down.
Now is the time to get these stocks in your sights while the market’s calm.
3. Be Patient
Finally, with cash on hand, and a watch list ready to go… sit back, relax, and let the market come to you.
Some investors will tell you that you can’t time the market and while it’s nearly impossible to predict market bottoms or tops, you can increase the profitability of your short-term trades by following momentum.
And as I’ve previously mentioned, stocks are approaching super-heated conditions.
The S&P 500’s 14-day relative strength index currently reads 65.8 out of 100, less than five basis points shy of the overbought threshold. And the small-cap Russell 2000 Index is already overbought.
Breadth – or overall market strength – remains strong enough to keep forward progress moving over the next few months.
But with near-term momentum topping out, consider letting the market cool off a bit before getting aggressively long.
Follow these three steps and your portfolio may very well reward you with profits – and much sooner rather than later.
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