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
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
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
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
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
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
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
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.)
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