Opinion: Dancing on Wall Street turns bull market bearish

Could the opposite of that be, “The time to sell is when there is dancing in the street”?

Does your barber or stylist talk about investments? At social gatherings, do the participants spend more time talking about stocks or Dow Jones’ 13,000 than they do talking about their children or grandchildren? If so, consider that an early warning signal that the bull market may be running out of steam.

It is also instructive when the New York Times Best Seller List includes several books on investing. And not to be ignored are promotions on radio and TV for seminars or software that will allegedly help you become a great stock trader or turn your $1,000 into a gazillion.

Three of the most frequently read, watched or listened to authors and lecturers are Robert Kiyosaki (“Rich Dad, Poor Dad”), Suze Orman (“Money & Women”), and Jim Cramer (“Mad Money”).

Why do we call these early warning signs? Because by the time there is very broad public interest, interest that includes and excites uninformed investors, the professionals will have already profited.

The problem with using these indicators of a market due for a pull-back is that it is of little, if any, use in timing a correction. Just as the market needs to build momentum to confirm a significant move, either up or down, the man-on-the-street indicator needs to increase its frequency and volume.

Just a warning

I am not calling for the beginning of a bear market. We’re talking about early warning signs; how early is an uncertainty.

The last time I wrote about these anecdotal indicators, it was almost a year before the big correction of the dot-com bubble days.

It is this uncertainty on the part of many informed investors that has led them to become more defensive in the construct and management of their portfolios. Companies that have histories of regularly increasing their dividends have garnered attention. So have companies that have a large percentage of their revenues generated outside the United States, those with strong brand names and those that are in industries that have traditionally been considered defensive. Among the companies that have benefited, or should, from this shift are Anheuser-Busch, PepsiCo, Coca-Cola, Caterpillar, IBM, Eli Lilly, Schering-Plough, Zimmer Holdings and Johnson & Johnson. Notice the number of health care companies in the list? Guess what? The boomers are getting older! (Editor’s note: the author’s company, Saint Louis Investment Advisors, owns, on behalf of its clients, positions in the aforementioned companies.)

If the market should decline, portfolios should have a degree of protection if they hold nondomestic assets. With the U.S. gross domestic product projected to grow around 2.2 percent while the world GDP is projected to grow at just under 5 percent, investors should position their portfolios to take advantage of that growth differential.

The easiest way to invest in non-U.S. assets while achieving diversification is through the ownership of exchange-traded funds that are country- or region-specific.

Positive signs

So much for the possible negatives; let’s look at the positive areas of the market where longer-term investors should see consistent growth.

The financial, energy and health care sector all have outstanding long-term positives.

The financials are increasing their international business and are benefiting from the corporate financing activities in the trend of companies going private. Energy remains attractive, as the demand for oil continues growing to feed our needs and the rapidly expanding economies of the emerging markets (especially China and India), and even if this country produces a coherent energy policy to move toward alternative sources, the transition will take many years. Health care, as mentioned above, has the baby boomer demographic working in its favor.

Think about it: Are any of us likely to use fewer prescriptions as we age?

Clark Davis is a 37-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money-management company. He can be reached at cdavis@slia.com.