Brian Belski, Merrill Lynch's U.S. sector strategist, says low-quality stocks have been among those leading the climb since the S&P 500 made its latest bottom on November 20. That's not a sign market weakness has healed. He says tight lending is still a big risk for stocks, especially in the bits of the market that have gained the most during the latest mini-rally.
Belski says the trend toward low-quality leaders is "particularly troubling to us given that the economic environment continues to deteriorate and credit markets have yet to show any signs of loosening up." That means investors should consider taking some profits from the past few weeks, especially in consumer discretionary, financial, energy, materials and industrial stocks where companies rely more on leverage than their higher quality peers at a time when banks are still scared to lend.
What should you keep? Belski says focus on high-quality companies with enough cash to get through the current turmoil in the economy. Specifically, that means sectors like technology and healthcare where cash on the balance sheet has been expanding.
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Daryl 12:05PM January 12, 2009