Look toward energy for leadership


The S&P 500 has performed pretty much as I expected, melting higher in the new year as the U.S. economy strengthens and European anxieties wane. This leaves us in a tricky place for many of my favorite names, such as Terex, Huntsman, and NXP Semiconductor, have made big moves and are now hard to enter. Most good stocks are in a similar situation.

As a result, I think it's time to look toward a sector for leadership, and that sector is energy. I will use the Energy Select Sector SPDR exchange-traded fund as an index for the group. The XLE has lagged the S&P 500 in recent periods, ranging from one month to one year. In the last week, however, it's starting to outperform, and I suspect that will continue for the next few months.

The first reason is seasonal. XLE has done better than the S&P 500 in the first quarter of every year since 2000 except for 2010 and 2009 (when it was even). The second reason is related to the euro, which appears to be in the midst of a big short squeeze following the Greek fears of late 2011.

Given that energy tends to follow the euro, this will lift the XLE. The third reason is China, where policymakers are starting to loosen the handcuffs that have been in place for more than a year. In addition, a state-backed economist has made noises that China may also help finance a Greek bailout.

Crude oil is also consolidating above its 200-day moving average and looks like it's getting ready to push higher.

Silver and copper should also rally in this environment because they're tied to economic growth. They too benefit from fears about inflation, and pretty soon the pundits will be arguing that central banks are "printing money" to bail out Greece. I put that in quotes because I am not sure it's entirely accurate, but that will be the perception.

The bigger trend will be something similar to the 2004-2007 period, when money flowed into commodities and foreign currencies as investors focused on global growth. As long as we don't have deflationary debt crisis, "sell the dollar, buy commodities" seems to be the bigger theme. Crisis will probably return in some form down the road but, for the time being, it looks as if we're melting up.

If you're looking for individual names aside from these areas mentioned above, a few opportunities stand out in my view. Once again, treat them as suggestions rather than outright recommendations.

Silicon Motion Technology (SIMO):
A fast-growing supplier of mobile chips, this stock has been riding the Android wave. Earnings have steadily beaten estimates going back to at least April, and its last report on Feb. 2 was equally strong. This time, however, investors decided to take some profits, and the stock has pulled back nicely. It's now down to an area where it consolidated in November and December, and could be an attractive entry point one again. It also drew bullish call buying recently.

Idenix Pharmaceuticals (IDIX): This drug developer exploded higher last month after reporting positive data for its hepatitis C drug candidate and has since pulled back to about $11.50 after trading above $15 on the news. One tricky thing here is the entry because it may rally from its current level. Or it could first drop down toward the $10 level where it peaked in 2008. Regardless, it looks bullish over the longer term.

Zagg (ZAGG): This is a crazy stock that makes insane moves, as befits its name. It has a giant short interest at more than 40 percent of the float but is also seeing rapid revenue growth. It recently shot up after some bullish call buying and now looks as if it wants to rip through its 100-day moving average and keep on going. ZAGG makes protective coverings for smart phones and tablet computers.

(A version of this article appeared in optionMONSTER's What's the Trade? newsletter of Feb. 8.)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.

This article appears in: Investing , Options

Referenced Stocks: IDIX , SIMO , ZAGG



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