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Where To Pull Profits In This Uncertain Market

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I am a skeptic of this seemingly endless bull rally from our March lows. Unemployment is sitting at its highest levels since the Great Depression, and I think the markets are overestimating how quickly the unemployment will recover. The US government is subsidizing the unemployed population, and many are making even more than they would if they were employed, but this cannot last forever.

The current (excessive) level of unemployment benefits will be gradually reduced until it reaches pre-COVID levels, but this will occur much quicker than it takes unemployment to recover. It could be years before consumer spending reaches its pre-pandemic levels, which will weigh on long-term EPS growth. 

The markets right now are pricing in the best-case scenario, and I think a pullback is needed.

Every prior recession saw stock market run-ups off the bottom only to see more volatility in the months following. This medically induced recession is unconventional on a lot of levels than prior economic downturns, including the computer-driven trades that led to the rapid market crash and massive rally that followed.

Don't Buy The Peak

I'm not going to say you should be selling everything in this frothy market scenario, but there are stocks that I may consider pulling some profits on.

Apple (AAPL - Free Report) is one such example. Although this enterprise has a lock on the US smartphone, its innovation and long-term growth potential have taken a nosedive from my perspective since Tim Cook took the helm. Still, investors continue to pour money into this stock, stretching its valuation further and further on the hopes that its service segment will explode, and its 5G iPhone will be a huge success.

Its most recently released Apple TV+ service was unable to gain the traction the company wanted, and its 5G iPhone may be pushed back due to COVID related supply chain issues. I'm a seller of AAPL as it sits at all-time highs of roughly $350 per share.

A couple of other companies that I would consider pulling some profits on include Shopify (SHOP - Free Report) , Zoom (ZM - Free Report) , and Peloton (PTON - Free Report) . All of these firms have had enormous share price run-ups since this pandemic began, and I think there has been a little too much fluff priced into these 'trendy' stocks.

When deciding where to take profits think about stocks that have been COVID-trendy. These types of hyped up companies may have priced in too much growth and could be due for a pullback.

Techs Silver Lining

Tech companies in cloud-computing and other work-from-home related segments have been provided with a robust long-term tailwind. This, combined with the Feds low-interest outlook extension, makes a lot of these tech companies more valuable today than they were before the pandemic.

Companies like Microsoft (MSFT - Free Report) , Nvidia (NVDA - Free Report) , and Adobe (ADBE - Free Report) are justifiably sitting at all-time highs because of their extraordinary long-term potential. These are the sort of enterprises that are driving the 4th Industrial Revolution and will come out of this pandemic's ashes with a vengeance.

The Takeaway

The markets have priced in the best-case scenario, and from my perspective, it's hanging by a thread. I would not recommend putting any sizable amount of money into the markets at this time.

The levels that I am looking for concerning the S&P 500 are 2,935 for the first support and 2,800 for the second, at which point I would be a buyer of the broader stock market.

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