Interview: 9 stocks for a sideways market

These should be exceptions to the rule as we revisit the risky days of 2011.

By Apr 16, 2012 2:46PM

By Kate Stalter,

Advisor John Benedict uses a proprietary index for identifying market trends and specific opportunities. He shares some ideas his method has identified in the trending sectors this year.

Kate Stalter: Today's guest is John Benedict of J2 Capital Management.

John, we have talked before. I know that you use a trend-following methodology based on some proprietary metrics. Maybe you could start out by telling us a little bit about some of the indicators that you use, and what they are showing you right now?

John Benedict: We've developed a number of proprietary indicators to help us determine more intermediate-term trends in the market.

The main indicator that we use here at J2 is something called the Risk Controlled Index. What this index does is it tries to measure supply and demand inside the market, to give us a gauge of both the risk that is happening out there vs. the reward that anybody could take at a specific time.

Where we look now is, the indicators are actually pointing very strong, as they should. The markets have been up quite strongly since that October low that we experienced. Consequently, our indicators really shot up, and have remained strong since then. It has dipped down in the past week, but from a longer-term perspective, I wouldn't be too concerned.

On a shorter-term perspective, if we look at that, I would currently say the market is at an indecision mode at this point, right now. What that basically means is, we are not quite sure if the markets are actually in a process of correcting here, either through time or through price. The markets could chuck sideways here to work off some overbought conditions that we have experienced since October, before it resumes a rally.

Another possibility is we could correct. But when I'm looking at the markets and looking at certain indicators, we could have a pullback of maybe 5%, 6%, or 7%, but I would assume it would stop there before we went back up.

In the short-term, I would say there's indecision at this point right now, so I would be a little bit neutral in the next couple of weeks. Longer term, though, the trend is up, and so I think you have to accumulate strong stocks on any pullback in the market.

At this point, quite frankly, a 5% pullback in this market would be terrific, especially for a lot of people that have remained out of the market for quite some time, as shown by the retail investors really not participating.

Kate Stalter: Let me follow up on that. What are some actionable steps that retail investors can take right now, keeping in mind that our listeners here use a range of strategies, everything from buy-and-hold to day trading?

John Benedict: So the typical retail investor, obviously the volatility that we experienced last year, and really even the past three to five years, has probably scared most of these investors out of the market. And let's just say it is probably a loss of confidence.

I would recommend that most retail investors do sit down and talk with a financial advisor that is knowledgeable about markets. Specifically, I would try to work with those that are a little bit tactical, rather than buy-and-hold, because at least with the tactical manager, you might be able to take some of the downside edge off of the portfolio. That is where most investors get scared; it is really on the downside.

I would definitely be looking for a pullback to slowly start to get in the market. Really it makes sense even for the most conservative investor that is scared about the markets to at least have one-third to 40%, something like that, of their money in the market to participate.

Kate Stalter: What would be a shopping list then, or at least a watch list, that people should be looking into at this time?

John Benedict: That is a great question. When I look at the markets, there are two sectors that really stand out to me, really strong sectors, and they have been for the past couple of months. And that is technology and consumer discretionary. This is specifically companies domiciled here in the U.S. that get the majority of their business in the U.S.

So in the technology space, there are a couple of stocks that I am watching for pullbacks here. Those could be companies like Rackspace (RAX), Intuit (INTU), ShuffleMaster (SHFL), or MercadoLibre (MELI), which is an international company.

There are quite a few technology companies that do look good. Obviously a lot of people will point to Apple (AAPL) as a driving source behind technology, but I'm actually seeing a lot more companies other than just Apple.

There is an ETF out there, I think it's iShares S&P North American Technology-Software Index Fund (IGV), and it is a pretty broad-based technology, that is a software index. And that has done very well. You could even look at an Technology Select Sector SPDR (XLK) or an IGV; those would be something I would probably point toward on the growth side.

On the value side, I think dividends could play an important part over the next few years for investors' portfolios. There are a few names I'm watching here too, and that would be Berkshire Hathaway Class B (BRK.B), McDonald's (MCD), and then a technology company called Microchip (MCHP), a technology company that has about a 3% dividend yield. Intel (INTC) and Microsoft (MSFT) would be some other more value-oriented names, as well.

Even if you wanted to pare down the risk a lot more than that, the last time we talked I pointed out high-yield bonds. I still think high-yield bonds probably offer some of the best risk-reward value that is out there.

You are looking at 7% to 8% annual dividend yield on these; they tend to track the stock market with about a quarter of the risk of the market. So I think that is a very easy way for people that might be scared of risk to look at the market.

There are a few things I might avoid right now. I would probably avoid anything European, so stay away from maybe the EAFE Index, anything tied to Europe. I think that there is too much headline risk that is there right now.

Energy and commodities have also really lagged the market in the past few weeks and past few months, so that would probably be an area I would probably stay away from as well.

See also:



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