Valuation worries are starting to slow this rally

09/21/2009 10:45 pm EST


Jim Jubak

Founder and Editor,

Stocks are starting to strike many investors as pricy.  How can I tell?

Days like September 21 are a pretty convincing sign.

On Monday, while market leaders such as commodities and materials stocks pulled back, healthcare--specifically shares of biotechnology companies moved up.

What's significant about this kind of day is that biotech stocks have lagged the market through just about all of this rally.

And there's really no good reason that they should be showing strength relative to the rest of the stock market here (well, Celgene (CELG) did get an upgrade from a Wall Street analyst) except that they've lagged for so long.

And that makes them relatively cheap.

When a rally gets long in the tooth, and I think this one qualifies, traders who are worried that stocks in general have become pricy but  who don't want to give up on the move scout around to find cheaper sectors. By selling the leaders and buying the laggards, traders can take some money off the table and reduce their risk by going with stocks selling at lower valuations while still not abandoning their chance to profit if the rally keeps going.

Trades like these are usually not as profitable as owning the leaders--if the market rally is going to continue. And traders are only willing to make them when their worry starts to exceed their greed.

Watch to see if the old leadership reasserts itself in the next few days. Biotechs aren't strong enough to carry the rest of the market strongly higher by themselves.
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