Taking Profits on Stocks and Oil

04/13/2009 1:00 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

Jim Jubak, senior markets editor for MSN Money, says the market has been strong, but he’s concerned about the economy and is selling an oil stock that’s had a nice run.

Has the stock market bottomed?

Certainly many investors think so—enough at least to have led a 25% rally in the Standard & Poor's 500 index from the March 9th low to April 3rd.

But we've been here before. After the low of November 20, 2008, the S&P 500 climbed an almost identical 24%, then tumbled 27% to set a new low for the bear market that began in October 2007.

And frankly, I think it pays to wait right now. I want to see a turn confirmed and confirmed again before I put more money into stocks.

[Because] I think the stock market has run way, way ahead of the economy. Too far ahead.

A growing number of economists now believe the US and global economies aren't going to bounce back quickly from this downturn. The Congressional Budget Office projects that the US economy won't get back to full-trend growth until 2015—and that the full-trend growth rate will be just 2.3% a year.

What can investors expect from an anemic economic recovery? A quick rebound in stocks, as hopes soar that the bad times are finally over, followed by stagnant share prices as the realization sets in that the recovery doesn't look all that different from the preceding recession.

Whereas a month ago every bit of news was seen through the darkest glass possible, today everybody is going gaga over the slightest sign that things aren't getting bad as quickly as they were in January. One result has been a strong rally in the price of oil—the spot price of Brent crude has climbed 25% in a month, for example—that just isn't justified by the economic data.

With everybody from the Federal Reserve to the Organisation for Economic Cooperation and Development (OECD) getting more pessimistic about when the recovery will arrive (2010 now) and how strong it will be (not very), I think oil prices are due to retrace a good part of that gain. That means oil stocks, especially those that have moved up most strongly, are facing a correction, too.

Shares of Petrobras (NYSE: PBR) have climbed 137% since the November 20th market low and 33% since the March 9th low. As much as I like the long-term prospects for Petrobras, I think the process of turning those prospects into oil is going to take so much capital and so much time that right now it's priced into the stock.

My target price on these shares is $41 by December, and at a current price near $36 a share, I just don't see the up side in holding right now. So I'm going to sell these shares with an eye on reestablishing a position in the mid-$20s when this rally falters.

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