The Bulls Are Retreating; Where To Take Profits

Bloomberg reports that the latest sentiment reading among newsletters surveyed by Investors Intelligence is at a 15-month low. As recently as early August more than half of newsletters were in the bullish camp. Last week that was down to 37%.

The reading from the American Association from late last week shows 35.5% of members are bullish on stocks over the next 6 months. That’s down from an above 40% reading in late August, as shown in this chart, and below the 39% long-term average for the AAII sentiment bullish sentiment survey:

US Investor Sentiment, % Bullish Chart

US Investor Sentiment, % Bullish data by YCharts

The AAII bullish sentiment survey works best as a contrary indicator when it is further afield from its norms. While we don’t have that right now, the fact that pros and individuals are less optimistic is still potentially telling. Most bull markets get cut off at the knees once sentiments heads for the stratosphere. We’re definitely not there.

That said, some segments looks ripe for some profit taking. The average p/e for consumer cyclical stocks in the S&P 500 has grown from 17.1 last year to a 2013 estimate of 18.8x according to S&P Capital IQ. The overall index trades at 15.1x estimated 2013 earnings. Consumer defensive stocks have also seen sizable multiple expansion from 16.2 last year to an estimated 17.2 for 2013.

Using the YCharts screener, consumer discretionary stocks such as Home Depot (HD), Nike (NKE), Lowe’s (LOW) and Yum Brands (YUM) all have trailing p/es above 20. Among consumer staples, staid household names including Campbell Soup (CPB), Hershey (HSY) have trailing p/es above 25, and Colgate-Palmolive (CL) and Kellogg (K) are above 20.

The energy sector is the counterpoint, with an estimated 2013 p/e of 13.2. Yes, it’s been a laggard in 2013, as sluggish economic growth here and abroad tamped down demand. But combine expectations that U.S. growth is about to accelerate out of its second and third quarter sequestration funk, Europe has emerged out of recession, and China has from the latest indications avoided a hard landing, and you’ve got the makings for increased demand next year. A stock such as Chevron (CVX) surely doesn’t look pricey, no matter what time frame you’re focused on:

CVX PE 10 Chart

CVX PE 10 data by YCharts

And a 3.3% dividend yield provides a nice cushion if you happen to be tilting toward bearish. Though one metric to keep an eye on for Chevron is its dividend payout ratio, which has recently climbed toward 60%, above its longer-term norm (2009-2010 excluded).

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.

Read more articles about: Investing Ideas  stocks that look pricey   

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