The Striking Price

Indulge Your Appetite for Stocks

STEVEN M. SEARS

May 11, 2013

For now at least, the stock market seems to be the only opportunity available. It’s OK to buy, but keep an eye on the exit.

Embrace your inner pig. Be greedy. Believe the hype on TV and forget you ever heard anyone say bulls make money, bears make money, but pigs get slaughtered. It’s OK to be a pig.

"Pigs are making money right now and they’re making a lot," explains a trader.

How? They are buying the dip, buying the rally and buying just about anything, especially cyclical stocks. Pourquoi?

"It’s the realization that there’s nowhere else to put your money," adds a senior trading strategist. With interest rates near zero, and the real rate of return on bonds not much better, equities look like the only opportunity right now.

Normally, defensive options trading accompanies major stock market highs as investors try to hedge gains. Not now. No one really wants to buy bearish puts that would increase in value if the Dow Jones Industrial Average, which just crossed 15,000, fell from its historic high. They’d rather buy bullish calls, or take profits on bullish calls when the tape momentarily sours as it did Thursday when a random Twitter comment that the Federal Reserve might end its quantitative-easing operation sooner than expected sparked a rumor that, in turn, sparked some selling.

Though pigs eat just about anything, some have exquisite noses. The market’s fancy truffle pigs, as it were, are sniffing around cyclical stocks that historically have led the market higher when the economy is strengthening. Think industrials, energy, and materials.

"Adding exposure to cyclical sectors is an overarching theme," one strategist notes. "How clients play it tends to be based on the type of client they are. Some play it through single stocks and calls. If they are a global macro fund, they play it through sector exchange-traded funds or even emerging-market-type stuff."

With the caveat that anybody who aggressively trades this market must babysit positions and be made of the stern stuff that responds to changing market conditions with discipline and equanimity, focus on the Select Sector SPDR-Materials (ticker: XLB), Select Sector SPDR-Industrials (XLI), and the Select Sector SPDR-Energy (XLE).

Think of each fund’s components as a trading menu. Correlation within the Standard & Poor’s 500 is down sharply. Many stocks are outperforming benchmarks. This creates significant interest in buying individual stocks. Some investors simply crack open fund portfolios and buy the most-heavily weighted stocks. Others are more nuanced.

GOLDMAN SACHS’ PORTFOLIO strategists, David Kostin and Stuart Kaiser, are telling their clients to focus on 25 global cyclical stocks that should outperform the S&P over the next 12 to 18 months as investors grow more confident about U.S. and Chinese economic growth. Recommended stocks include, Johnson Controls (JCI), BorgWarner (BWA), Cameron International (CAM), Noble (NE), Marathon Oil (MRO), Schlumberger (SLB), Rowan (RDC), Tyco (TYC), Danaher (DHR), General Electric (GE), Rockwell Automation (ROK), Microchip Technology (MCHP), Linear Technology (LLTC), Analog Devices (ADI), Xilinx (XLNX), Molex (MOLX), Cisco (CSCO), Qualcomm (QCOM), JDS Uniphase (JDSU), Jabil (JBL), MeadWestvaco (MWV), Air Products & Chemicals (APD), Dow Chemical (DOW), Praxair (PX), and Freeport McMoran (FCX).

The strategists expect global economic growth to improve in the second half of this year and that their stock basket should rally.

So, be a pig. Ideally, be a paranoid pig, because when the porcine party ends, it will end quickly, and viciously. That’s why it makes sense to use bullish call options as stock proxies. Calls cost less than stocks, so you lose less when the party ends. And pay attention to individual investor sentiment and margin debt. When the public is all in, the abattoir will be open for business.

Reprinted by permission of Barron's Online, © 2013 Dow Jones & Company, Inc. All Rights Reserved Worldwide.

The views expressed in the above papers and articles are solely those of the author of the article, and do not necessarily reflect the views of OIC; the information presented is not intended to constitute investment advice or recommendations to purchase or sell securities of any company; and the information presented is based upon particular events that may or may not recur in the future.