The No. 1 Reason to Take Profits Now
By Jeff Clark
May 15, 2008
The canary is cautious.
Longtime Growth Stock Wire readers know I watch the short-term action in Merrill Lynch shares to predict the coming strength or weakness in the overall market. MER is my proverbial canary in the coalmine...
If the stock acts well, then investors can look forward to strength in the market. And if MER shares struggle, then weakness lies ahead.
I've probably made more money trading off the short-term action in Merrill Lynch shares than in any other single technical indicator. So, at least for me, the canary pulls a lot of weight.
Right now, MER is struggling.
Take a look at the following chart, which compares the four-day action in MER with that of the S&P 500...
You can clearly see MER shares have been underperforming the overall stock market... MER is trading higher but is lagging the S&P.
Understand, this isn't a sign of impending doom. But it is a sign that the market may have a tough time holding on to any further gains. We may see a fairly swift downside move kick off soon.
Friday is option-expiration day, which adds in the potential for volatility. Since we've rallied so strongly so far this week, we may be ready for a countermove. Add in the increasingly bullish sentiment among investment advisors (which is best used as a contrary indicator), and we have a pretty compelling case against getting too aggressive on the long side.
In fact, taking a few profits off the long side and making a few short-side bets seems like the best thing to do right now.
Don't sell your entire portfolio. But you've seen some terrific gains since March 27, when I suggested it was time to buy. Judging by the canary, now is a good time to lock in those gains.
Best regards and good trading,
Jeff Clark
