Broker Talk: Proceed With Caution

After rallying 50% from its March low the market is starting to look expensive – and it looks even pricier when you factor in that we're heading into September, historically, the worst month for stocks. But that doesn't mean investors should take their profits and run. Caution, not bearishness, should rule the day, these brokerage experts say.

Who's Talking: Liz Ann Sonders, chief investment strategist, Charles Schwab

The Gist: September is historically the worst month for the stock market -- the S&P 500 has averaged a negative 1.3% return during the month since 1928 -- but then again equities could probably use a time out, anyway, Sonders says.

Sonders is optimistic that the economy has already turned a corner and believes the first stage of the rebound will be more robust than most believe. Indeed, she estimates that third-quarter gross domestic product could come in above 5%. By comparison, economists surveyed by The Wall Street Journal forecast third-quarter GDP at just 2.4%.

Yet even though she thinks the market's "monster rally" still has some legs, she thinks it’s going to need to take a breather first.

Why? Because a number of investor sentiment indicators have become too positive, she writes. (It's counterintuitive, but bullish sentiment is actually a negative signal, market watchers have found.) Making matters worse are all of the publicly-traded companies that have been offering additional shares in order to raise capital, resulting in a flood of supply in the equity markets. "A decent percentage of these offerings have been forced by government regulators, but rising supply is still a bee in the market's bonnet," Sonders writes.

Given the market correction Sonders sees on the horizon (one she says could bring back some of the healthy dose of pessimism that sparked the March rally she advises that investors use the time to their advantage.

For example, investors who sat on cash and missed most of the rally might want to take advantage of any pullbacks to rebuild equity positions, she writes. Meanwhile, investors who consistently added to their stock portfolios over the last six months might just want to sit tight. And "if you've gone hog wild on stocks and are above your long-term allocation," taking some profits probably makes sense, Sonders says.

Who's Talking: Jeffrey Saut, chief investment strategist, Raymond James

The Gist: The current state of the stock market is like the old Timex watch slogan: "It takes a licking and keeps on ticking," Saut writes. Despite the angst over Chinese stocks entering bear-market territory, the "overbought" technical observations, the "vitriolic violations" of 10-day moving averages and all the other negatives mentioned by the bears, Saut maintains his refrain of "cautious, yes; bearish, no."

"The equity markets are merely fear, hope and greed only loosely connected to the business cycle," Saut says. "If the typical sequence continues to play, the negative nabobs who opined that the world was coming to an end last March will continue to espouse that this is just a 'short covering' rally in a bear market."

Saut doesn’t buy that bearish argument. Rather, he keeps reminding clients that during the beginning of every new bull market, most participants believe it's just another rally in an ongoing bear market. After all, the consensus view historically tends to be wrong -- and gets investors into trouble by encouraging them to buy at the top and sell at the bottom.

"Verily, most investors, being human, are 'social' creatures, preferring herd-like instincts to stand-alone behavior," Saut writes.

Since Saut believes the herd continues to move in a greed-induced buying stampede, he advises near-term caution. However, if you're still sitting on too much cash and want to deploy it, he recommends lower-volatility stocks with dividends, such as Home Depot (HD), Chevron (CVX) and Pfizer (PFE).