It may be time for stock-picking soon

Anyone who's been trading for the last six months or so knows that we've had a lot of correlation, with stocks following the indexes and sectors almost in lockstep. While this is classic bear-market behavior, the good news is that we could be near a breaking point where stock picking makes sense again.

We got a glimpse of that last Monday when Germany's SAP agreed to pay a massive 52 percent premium for software maker SuccessFactors . Here's a company, after all, that had solidly beaten estimates and raised guidance for at least three straight quarters. Analysts at Credit Suisse, Canaccord, and Morgan Stanley couldn't say enough good things about it, but short interest was still more than 20 percent of the float. (We had also flagged the stock as a bullish play on InsideOptions Pro and researchLAB .)

The doubters got a rude comeuppance, but their negativity is symptomatic of this market. The underlying issue is a massive flight into bonds that began in 2005 when the Fed neared the end of its last rate-hiking cycle. Private pension funds led the charge, followed by Main Street investors.

That left equities in the hands of index-following hedge funds and ETF traders. These folks are also closely linked to changes in currencies, which is why the S&P 500 often follows the euro.

Given all the money that should be in equities but isn't, it's only a matter of time before investors return to picking individual stocks rather than just playing the indexes. So this week, I want to identify some areas where that process appears to have begun. Each of these have outperformed the S&P 500 over the last six months, but are all near their 200-day moving averages and seem to offer good potential points.

Videogames : Companies like Electronic Arts (ERTS), Take-Two Interactive (TTWO), and Majesco Entertainment (COOL) each beat expectations the last time they reported. Activision Blizzard (ATVI) also had good earnings and guidance but faces worries about weakness in its "World of Warcraft" title. The good news is that its new game, "Call of Duty: Modern Warfare 3," seems to be picking up the slack and then some. All four of these stocks also made higher lows in October than August, which is bullish because the S&P 500 made a lower low.

DirecTV (DTV) : A satellite-television name in a steady secular uptrend as it expands into foreign markets. It's spent the last year consolidating at its previous all-time high from early 2000 and now looks as if it's ready to continue into new territory.

Datalink (DTLK) : This is a small-cap technology company that repackages software from larger vendors such as Oracle. It's beaten estimates for the last three quarters and trades at about 9 times forward earnings, despite revenue growing at 30 percent and net income more than tripling in the last year. It made a big move earlier in the year but has been consolidating since then.

Zagg (ZAGG) : The bears seem to really hate this company, which makes accessories for iPhones and other mobile devices. They keep betting that it will drop and have pushed short interest is more than 40 percent of the float. Nonetheless, it has beaten estimates and raised guidance the last two quarters. It also had bullish call buying late in yesterday's session.

(A version of this article appeared in optionMONSTER's What's the Trade? newsletter of Dec. 7.)

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

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

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

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