The SPDR S&P 500 ETF (NYSEARCA:SPY) is trading at about its all-time high, but with the Fed taper begun, and the end of tax year ahead, I say sell the SPY on its high. There's no reason to bear risk here, despite the SPY's move higher post taper.
I often argue that buying and selling securities based on current price or recent history is not a smart long-term strategy, however effective it may be over the short-term due to technical factors. In this case, I see fundamental factors dictating the trade to sell the SPY, and they should not be ignored.
SPDR S&P 500
SPDR Dow Jones (NYSEARCA:DIA)
PowerShares QQQ (NASDAQ:QQQ)
Let's look at the SPY's year-to-date performance, along with other market relatives, the SPDR Dow Jones and the PowerShares QQQ . We can't help but notice the heavy paper gains marked over this past year for each security, especially the SPY, which is up 27.6%. It's a better move than the Dow ETF, probably because of the growth characteristics of new entrants that keep the S&P 500 Index fresh, though the S&P 500 also includes "value" names.
The gains of the sort recorded by the SPY this past year are the type which are often put off until the turn of the tax year. That of course comes on January 1st for individual investors. The tax consequences of capital gains and losses often dictate end of year actions, though with regard to the market index, there may be less of it than with individual securities that can be replaced by other stock specific names. Still, capital gains are often not taken until the turn of the year, and that is just two weeks away.
Secondarily, the Fed, however masterfully, is tapering back its asset purchases now. While it is doing so in Goldilocks like fashion (just right), it is still doing so and signaling a shift in easy money policies. The cost of capital will increase for corporations as a result, though theoretically, returns on capital should as well. Still, when interest rates are on the increase, and especially at inflection, stocks can be expected to take a breather. They should at least do so until investors see evidence of robust earnings growth and healthy economic activity under the new conditions. This only exacerbates the tax driver for stocks, and so there's all the more reason to take profits from the SPY at the turn of the tax year.
Valuation always matters, but sometimes capital drivers dictate stock direction. In this case, the P/E ratio of the SPY is 17X trailing twelve months EPS of the S&P 500's components. The P/E ratio of the S&P 500 Index is currently 19.9X, which is both above the historical mean value of 15.5X and median value of 14.5X (data from multpl.com). On a price-to-sales basis, the SPY also looks pricey at 1.64X versus the mean value of 1.36X. Finally, on a price-to-book value basis, the index trades at 2.67X, versus the mean value of 2.75X, the first instance of relative value indication. Even so, we could not call it significantly undervalued on a price-to-book basis.
In conclusion, I believe capital flow factors and the now marked inflection point of Federal Reserve monetary policy will lead to an early January (at the latest) pull back in stock values and so in the SPY security. As a result, I suggest investors consider the sale of the SPY on high. Aggressive investors might also consider purchasing the ProShares Short S&P 500 (NYSEARCA:SH) or the ProShares UltraShort S&P 500 (NYSEARCA:SDS) for a leveraged bet against the movement of the S&P 500 Index.