The S&P/ASX 200 Index (Index:^AXJO) re-entered a bull market with every sector rallying this afternoon.
The top 200 stock benchmark jumped 1.5% as we headed into the close – near the its intraday high! This puts the index's gain at just over 20% since its March 23 bear market low.
This could be an opportunity to dump some stocks as the market rally only fuels fuel debate about overstretched valuations and a looming second market sell-off.
Bulls vs. bears
The pessimists are convinced that the wave of terrible economic data and a deep recession triggered by the COVID-19 pandemic will send the ASX 200 tumbling back into bear territory.
On the other end of the argument, the optimists point to the flattening coronavirus curve and the record stimulus from central banks and governments around the world.
Whether the Australian and global economy experiences a "V", "U" or "L" shaped recovery will determine the sustainability of the current bull market, in my view.
Knowing when to hold and fold
But whichever the recovery religion you subscribe to, Morgans believes this is an opportune time to lock in some profits and cut stocks that have run too far ahead of fundamentals.
"In April, key equity indices including the S&P500 (+13%) enjoyed their biggest monthly gains since 1988," said the broker.
"However there remains a much larger than usual range of uncertainties driving equities, and a large range of potential economic outcomes in the coming months.
"Defensive asset classes tried, but failed to match the risk-tolerance displayed in equity markets in April by largely trending. This ongoing disagreement in key asset classes is conspicuous and is cause for our broader caution on the market."
ASX stocks to sell
Even in the most optimistic scenario where the economy bounces back strongly in the near-term, businesses won't be the same as we learn to adapt to the post COVID-19 world.
This is why the indiscriminate rally on the market is concerning. It's more important than ever for investors to pick the right stock to hold and the wrong ones to fold.
Morgans believes the ASX stocks with too much good news priced into their shares include iron ore miner Fortescue Metals Group Limited (ASX: FMG), share market operator ASX Limited (ASX: ASX), job advertising website SEEK Limited (ASX: SEK) and online real estate classifieds group Domain Holdings Australia Ltd (ASX: DHG)
Weaker than their rivals
The broker is also wary of another group of shares. While Morgans rates these stocks "hold", it notes that they are poorly positioned compared to their peers.
These include dairy products company Bega Cheese Ltd (ASX: BGA), our largest gold miner Newcrest Mining Limited (ASX: NCM) and waste management company Bingo Industries Ltd (ASX: BIN) – just to name a few.
