Herding. Shepherds and cattle farmers have known about it for thousands of years. Sally Cow imitates what Daisy is doing, and Bossy soon joins in, as they all huddle snuggly close. But the phenomenon also is taking over in the stock market these days, as investors crowd into a smaller and smaller group of names that are “working.”
Most stocks were down Thursday, with decliners outnumbering advancers on the NYSE by a 3:2 margin. Yet the Dow came from behind to close almost 20 points in the green. How is that possible?
Well, the industrial average includes only 30 stocks, and several of those big names have attracted a lot of herd-mentality buying lately.
I’m not complaining, of course. Three of our stalwart holdings did quite well and continue to shine:
International Business Machines (NYSE:IBM) and Coca-Cola (NSWE:KO) both broke out in a big way, with IBM closing at an all-time high, and KO at a multi-year high. Intel (NASDAQ:INTC) is also testing the multi-year high range.
It’s worrisome, though, when so much money flows into a few favorites, while the rest of the market languishes. That kind of herding typically heralds the approach of an important reversal.
For the next few weeks, anyway, I don’t expect more than perhaps a 3%-5% pullback in the headline indices. However, a much bigger decline could follow once we get into the “sell in May and go away” period. If you’ve got a load of cash burning a hole in your pocket, take your time deploying it. There will be many more bargains to choose from down the line.
Among the few great values we’re focusing on right now, the oils continue to stand out.
A panicky headline in today’s Wall Street Journal suggested that the Elgin gas leak in the North Sea could cost Total (NYSE:TOT) “billions.”
Drill down into the story, though, and you find that the billions figure comes into play only if the French company’s offshore platform blows up and the entire project is scuttled. While a catastrophic explosion is certainly possible, it hasn’t happened yet — and engineering experts say it probably won’t.
Four paragraphs from the bottom of the article, we stumble upon an analyst’s sober assessment that the mishap will dent TOT’s 2012 earnings by a whopping 1%-2%. Whoever gave the media the nickname “merchants of hysteria” (could it have been me?) nailed this one to the wall.
Buy TOT, with a current yield of 6%. A year from now, I’ll be surprised if the stock hasn’t made you 20%-25% richer.
For broad exposure to the entire energy sector, consider the Select Sector Energy SPDR (NYSE:XLE), an exchange-traded fund that owns all the oil-and-gas-related stocks in the Standard & Poor’s 500 index. With an ultra-low expense ratio of only 18 cents a year per $100 invested, XLE costs far less to operate than most energy-sector mutual funds — a powerful long-term advantage for you.
