Opinion: It’s time for short-term investors to pare back stocks

Long-term investors should just ride it out. But here are five reasons why aggressive traders may want to cash out some profits now, to redeploy ahead of the Santa Claus rally likely to play out later in November or December.

Reason 1: Investor sentiment is now neutral

During the August sell-off and the late-September retest, the bleak outlook of money managers and the public signaled that it was a great time to buy, in the contrarian sense. Often, the best time to buy is when everyone is disgusted and negative. That was certainly the case then if you could muster the courage to buy.

Reason 2: Insiders are now more cautious

To be clear, corporate insiders are not downright bearish. But the bullishness they displayed back in late August and September has worn off with the big move up in stocks since the start of October.

Reason 3: Market ‘internals’ look a little troubling

We all like to track the fairly narrow indices like the S&P 500 or the Dow Jones Industrial Average, for simplicity. They’re deceptive, though. Because a relatively small number of stocks inside those narrow indices account for a large part of their market cap.

Reason 4: Stock valuations are not cheap

During the past 52 years, the S&P 500 has had a mean price-to-earnings (P/E) valuation of 16.3, according to Ned Davis Research. As of the end of October, it was at 21.9. In short, it looks overvalued, historically. To be clear, stock valuations aren’t really a good market-timing indicator. But with valuations stretched, investors have less incentive to beat the drum and push stocks higher from here.

Reason 5: Small-caps have lagged behind

While the S&P 500 and the Nasdaq 100 recently hit new highs for the year, the Russell 2000 is in the red for the year.