"To everything there is a time and a season. A time to be a buyer, and a time to be a seller, a time to speculate and a time to take profits. When insiders are selling, it's the time to sell along with them." - Anonymous
This incredible 2012 stock market rally is a perfect time for savvy investors to be shorting their favorite stocks and indices. That's correct, I said "shorting".
Think of it. What do big-time traders do when they "short" a stock or an index? They "borrow" the stock or an ETF, they sell it, and then they sit back and pay some interest hoping that the stock or ETF will drop sharply in a relatively short period of time so they can "buy-to-cover" the shares they "borrowed", thus "paying back" at lower prices and pocketing the difference.
Last Thursday and Friday, while between the NYSE and the Nasdaq stock exchanges over 530 companies hit new 52-week highs, Apple (NASDAQ:AAPL) shares barely budged on much higher-than-average volume. It was just less than a week ago AAPL shares hit an all-time high of over $526-a-share.
As veteran stock analyst and editor Mark Hulbert recently pointed out, all this doesn't mean that the bull market is over. In an article he penned on Feb.16th at MarketWatch.com, we may be several months away from the market's peak. He claimed that Ned Davis Research recently reported that there appears to be a long lag time between the time the stock market peaks and the number of stocks hitting new highs. And the fact that the last two trading days of last week saw only 31 stocks that hit new lows between the NYSE and the Nasdaq, gives us more reasons to think that the market may be moving even higher in the short-term.
The stock market appears to be "frothy, bubbly and irrational". I'm aware the market can stay irrational longer than we can stay solvent, but things are smelling kind of "fishy" to say the least.
Consider Selling or "Shorting" These Stocks
First let me say that my idea of "shorting" is to buy put options. If you're really savvy and wouldn't mind owning the stock at much lower prices, buy some puts with a strike price slightly above the latest closing price and sell a put contract with a strike price down towards the stock price that you wouldn't mind owning the stock at.
For example, lets say you want to "short" Dell Computer (NASDAQ:DELL), which was downgraded by to Neutral from Outperform. Baird "...raised the upside target price to $20 following good share price performance in 2011 and YTD. They expect a solid FQ4 next week but see balanced risk/reward at current levels". If you think DELL might disappoint or get "dumped" after the earnings release, (insiders and institutions have been selling into Dell's rally) you may want to buy the May 2012 DELL put contract with a strike price of either 17 or 18. At the same time you could sell the May 2012 Dell put with a strike price of around 14.
If DELL closes below 14 by the third Friday in May you'll be obliged to buy 100 shares of DELL at that closing price for each put contract you sell. But remember, if you bought some May put contracts with a strike price of 17, and DELL closed at say $13.50, you'd pocket around $350 per put contract, not to mention the premium you pocketed earlier for the put contracts you sold.
This should more than offset the difference between the $14-per-share price you're having to pay for the DELL shares. So you're making some money while you're waiting for DELL to correct down to a price where you want to own the stock. Learn more by clicking here.
You may want to consider doing the same with companies like Microsoft (NASDAQ:MSFT), Heinz (NYSE:HNZ), Clorox (NYSE:CLX) and Kraft Foods (KFT). All of these are selling near their 52-week highs (except CLX) and are experiencing a large amount of institutional selling.
What Else We Might Buy at Times Like These?
Consider companies like precious metals producer Hecla Mining (NYSE:HL), which last Thursday reported the largest silver reserves and resources in the company's history. Silver reserves increased by 4% to 148 million ounces as of Dec. 31, 2011, while silver resources rose 13% to 281 million ounces. Hecla also reported that gold resources increased by 33% to 597,600 ounces, while lead and zinc resources increased by 21% and 26%, respectively.
HL replaced mined silver production from 2011 and added new reserves and resources. Total silver reserves increased from 142 million ounces in 2010 to 148 million ounces in 2011, while silver resource ounces increased from 248 million in 2010 to 281 million last year. Yet HL is still trading around $5 a share, and it has a fairly impressive dividend-payout-plan.
Another company that appears to be "on sale" right now is Basic Materials giant, Freeport-McMoRan Copper and Gold (NYSE:FCX). It is trading at less than 8 times next year's projected earnings and pays a 2.3% dividend.
In addition, FCX is on the list of the S&P 500 companies with the biggest gaps between their stock price and analysts' average price estimates as of Feb. 17. This is a really impressive "line-up" of mostly natural resource companies. FCX average target price is above $55, and it closed Friday the 17th slightly above $43.
It's very difficult to call a market top. But when large institutions and company insiders are selling selected stocks and companies as their share prices move higher, well, it may be time to be a seller too. It may even be time to "short" the stocks as described above. Good luck!