Friday, November 07, 2008

The Obama Trade

Here is an article I wrote for this week:

With the election over, investors are clamoring for ideas and trades that will work under the new administration. That is, given the new policies proposed by Obama (or at least campaign promises), which investments will fare best? The media are as much to blame as anyone for this game, as they continue to drag out strategist after strategist and pose this very question.

The most oft-cited choices that you will hear bandied about include alternative energy, where the new administration is expected to push renewable energies such as wind and solar, but probably not nuclear and coal. Also, health care is mentioned quite a bit, with a likely push toward more generic drugs and affordable health care (think managed care companies and health care cost containment).

The reason I haven't started throwing out individual names of stocks is that I believe taking a different tack will serve investors better. I believe in letting the market show us the way. From every correction or bear market a new group of leaders emerges, and these new market leaders often go on to post outsized gains. So there is no need to guess at this point on the eventual winners; we just need to continue to closely monitor the market for clues.

At the moment, that is easier said than done. This is because there are very few "leaders" right now. Today, the Nasdaq posted just two new highs. And over the last several weeks, there were a handful of days where the new highs totaled zero.

One of the sources I like to use to look for leading stocks is Investor's Business Daily, which devotes much of its space to the search for leading stocks. Even the screens I run on IBD's software yield very few names right now. And the ones I do see don't have anything in common, in terms of hailing from similar sectors or industries. Some of the examples are Strayer Education (STRA) , Aerovironment (AVAV) , Almost Family (AFAM) and PetMed Express (PETS) . A small and random group.

Another screen that I regularly look at is for ETFs that are exhibiting high relative strength ratings (on the IBD scale of 1 to 99). If you pull up any list today, one of the first things you will notice is that the top of the list is littered with inverse ETFs. So if you want to bet on continued declines in the market, you have plenty of choices. But if you're looking for long ideas, only three ETFs on my screen have relative strength ratings of 80 or better.

The first fund is the SPDR Regional Banking ETF (KRE), which sports an RS rating of 86 right now. The fund invests in a broad basket of smaller, regional banks. With the TARP program kicking in, there is a lot of talk that consolidation within the banking industry will increase, with the big players acquiring many of the smaller regionals. So this fund gives you broad exposure to that trend without having to cherry-pick the individual names.

The next fund is the SPDR Biotech ETF (XBI), which has an RS rating of 84. This fund holds a basket of many of the well-known biotech companies, large and small. Biotech often fares well on a relative basis during difficult economic times because of the high growth rates for many of the companies, as well as the thesis that the products they are producing are in high demand from the big drug companies, which serve as well capitalized buyers. On the chart, the XBI looks to have put in a solid double bottom around 46, and it is now working on breaking above that downtrend, which has been in place since August.

The last idea is the Consumer Staples SPDR ETF (XLP) , which also has an RS rating of 84 right now. This fund holds a basket of consumer stocks, everything from beverage companies to tobacco, food and drugstore items. Consumer staple stocks are often considered recession plays, since they are the products that most consumers don't tend to cut back on during recessions. You still need to buy your medicine and cleaning products. And given the dour news in the media, you might even drink and smoke more (not that I am not endorsing such activities).


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