It's increasingly clear that it's the beginning of the end of the recent market rally. The major indexes have moved steadily higher since Oct. 1, 2011, with some of the more speculative stocks becoming the biggest gainers. These stocks weren't cheap to begin with, so now they're really quite pricey.
In the weeks and months ahead, the market may still trend higher, but investors will likely take an increasingly defensive posture, gravitating toward more reasonably-priced stocks. For the market's biggest recent winners, trouble could be ahead.
I went looking for stocks that have a price/earnings to growth (PEG) ratio above 1.0, which means that the P/E ratio on projected 2013 profits is even higher than the projected earnings growth rate. Every one of these stocks has risen at least 30% since Oct. 1, trades for at least 35 times projected 2013 profits and sports a PEG ratio above 1.0. (In some instances, 2012 profits will likely be negative, making a PEG ratio hard to calculate.)
Some of these stocks were heavily shorted to begin with, and short covering simply pushed them much higher. Other stocks have delivered solid quarterly results, encouraging investors to embrace high-growth (but also high P/E) stocks. Yet with the U.S. economy still looking just OK (recent economic reports have been a bit more sobering), investors may soon shift gears and start avoiding the highest P/E stocks.
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