The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.
Nearly three-quarters of the stocks in the S&P 500 are trading near their 52-week highs.
That might sound like a great excuse to sell. But strangely enough, the market's momentum may be a sign that stocks could keep climbing.
Buy high. Buy even higher? Sure, it goes against everything long-term investors are taught. You're supposed to hunt for values in Wall Street's bargain bin.
However, there is evidence that investing in stocks even when the bull is starting to show some signs of age is not a terrible idea.
According to research from Pavilion Global Markets, a brokerage in Montreal, the market has historically continued to rally when a large number of stocks are already near their 52-week highs.
Pavilion found that since 1991, the S&P 500 rose an average of nearly 9% during the twelve months following a period when at least 75% of the companies in the index were within 10% of their 52-week highs.
That doesn't mean that stocks are going to go up without any hiccups. Pavilion also found that the S&P 500 actually dipped 2% during the first three months after a big chunk of stocks got close to their highs.
That makes sense. Many experts feel that the market is due for a small pullback, if not necessarily a major correction. And over the past two decades, it appears that stocks usually do slip immediately after getting near a new peak, and then wind up rallying again after the sell-off.
Of course, this time might be different. Many stocks are not just at 52-week highs. They are at all-time highs. There are also many reasons for investors to be nervous.
Europe's financial system is, to put it mildly, fragile. The overall U.S. economy is still puttering along, but there are worries that the job market recovery may be once again losing steam. Japan's aggressive monetary policies have some investors pondering a looming currency war. And North Korea is causing fears about an actual war.
That's why investors looking to jump on board the momentum bandwagon need to be careful. Some stocks trading near their highs are way too risky. But it's a mistake to declare that every stock that is up a lot must be overvalued simply because it has gone up a lot. Many stocks rise because they are great, growing companies.
So I ran a screen (courtesy of our trusty Thomson Baseline machine) to find stocks near their 52-week highs that still have reasonable valuations, healthy earnings prospects and low debt loads. Those are the types of companies you want to own for the long haul, and they should hold up better than others if the broader market does pull back.
Finally, investors shouldn't completely ignore stocks that are closer to their lows than their highs either. It's always a gamble to bet on a stock that's fallen out of favor on Wall Street. Something that may look like a steal may be cheap for a reason -- the proverbial value trap.
But if you time a rebound (or even just a shift in sentiment) right, it can be lucrative. Pavilion found that since 2001, the 30% of stocks in the S&P 500 that were furthest from their 52-week high actually outperformed the 30% that were closest to their 52-week high by a slim margin.
That suggests that the overall market could keep going up, but the companies leading the rally may change. We've already seen a rotation out of some of last year's hot stocks like Apple (AAPL) and Whole Foods (WFM).
While I'm still a little skeptical that struggling firms like Hewlett-Packard (HPQ), Best Buy (BBY) and BlackBerry (BBRY) are on the path to a long-term recovery, you can't argue with how the stocks have done this year.
That said, you'll be able to sleep a lot better at night if your portfolio has a mix of contrarian stock picks on the verge of a turnaround as well as shares of attractively valued companies that have done well because of great fundamentals.
The notion of buying low and selling high may need an update. But diversification never goes out of style.
Facebook will make its way into the Nasdaq-100 (NDX) next week, but the social network could find itself in the even more widely tracked S&P 500 (SPX) soon enough, too.
According to Standard and Poor's methodology, "initial public offerings should be seasoned for 6 to 12 months before being considered for addition to an index." Facebook (FB) just celebrated its six-month birthday as a public company a little over two weeks ago.
While MOREHibah Yousuf - Dec 6, 2012 1:41 PM ET
It was 25 years ago today when Wall Street suffered one its biggest market crashes in history.
On October 19, 1987, the Dow Jones industrial average (INDU) tumbled 508 points, losing more than 22% of its value and marking the second-largest percentage loss in a singly day. (The worst was when the Dow lost 24% on December 12, 1914, when the New York Stock Exchange reopened after having been closed for MOREHibah Yousuf - Oct 19, 2012 2:53 PM ET
The stock market keeps going up, and investors keep cashing out.
Mutual fund investors pulled $5.1 billion out of U.S. stock mutual funds for the week ended Sept. 26. The prior week, investors removed $4.8 billion from these funds, according to data from the Investment Company Institute.
The exodus from the stock market has picked up speed since the Federal Reserve announced another round of quantitative easing, or QE3.
By buying more MOREMaureen Farrell - Oct 4, 2012 12:45 PM ET
Investors might want to stop and thank the iPhone 5's clamoring herds for a boost to their stock portfolio this year.
Shares of Apple (AAPL) have surged 74% this year, helping the S&P 500 (SPX) log a respectable 16% increase. Take Apple out of the mix and the broad index would only have gained 14%, according to research from S&P/Dow Jones Indices.
Apple accounts for nearly 5% of the market cap of MOREMaureen Farrell - Sep 21, 2012 2:11 PM ET
Global demand for U.S. securities is still strong, with China remaining the largest foreign holder of U.S. debt, according to the Treasury Department's latest report on foreign holdings.
The U.S. government's top international creditor continued to add to its holdings, albeit modestly, according to the July Treasury International Capital report, which measures the flow of funds into and out of U.S. securities, including Treasuries, agency-backed securities, corporate debt and stocks, MORECatherine Tymkiw - Sep 18, 2012 12:44 PM ET
Sears Holding Company has had its membership in the S&P 500 revoked.
The ailing retailer, which owns Sears and K-Mart chains as well as apparel brand Land's End, will exit the index at the close of trading on Tuesday, Sept. 4, said S&P late Wednesday.
S&P said the number of Sears shares available to the public, known as its public float, has long been below the 50% threshold needed to be considered MOREBen Rooney - Aug 30, 2012 10:55 AM ET
Hedge funds are betting on a disaster hitting the financial markets within the next several quarters, with managers holding onto historic levels of cash.
That so-called dry powder gives them the cash they need to quickly jump in if markets sell off, according to numerous hedge fund managers and industry consultants.
"Most hedge funds I see are carrying lower market exposure than I've seen in some time," said Brad Balter, MOREMaureen Farrell - Aug 23, 2012 8:01 AM ET
Despite a stubbornly slow economic recovery at home and severe headwinds from Europe and Asia, U.S. companies are on track to deliver a tenth straight quarter of rising profits. But a closer look reveals some alarming trends.
With reports from more than 80% of the S&P 500 companies on the books, earnings are on pace to grow just 0.6% during the second quarter, the slowest since the third quarter of MOREHibah Yousuf - Aug 7, 2012 8:10 AM ET
Securities regulators in Spain and Italy both instituted short-selling bans Monday as financial markets tumbled.
The move is designed to limit the downward pressure on markets by preventing investors from betting against shares of certain companies.
The ban in Italy applies only to short positions in shares of banks and insurance companies, according to the Commissione Nazionale per le Società e le Borse, or CONSOB.
Spain's Comisión Nacional del Mercado de Valores (CNMV) MOREBen Rooney - Jul 23, 2012 10:44 AM ET
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