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Stimulating Upside for (Some) Stocks

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The tug-of-war between weak economic data and stimulus from central banks is creating a polarized and unpredictable market. Here's how to navigate the next several months safely.

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Regardless, I continue to recommend that investors avoid getting caught up in the market's wild swings and euphoria. Defensive groups such as consumer staples and health care traditionally lag the broader market during major rallies, but these groups are up 12.6% and 16.4% respectively this year, compared to about 17.8% for the S&P 500. Yet, both health care and consumer staples are far less volatile than the S&P 500 and they've avoided much of the carnage of the April-May market pullback.

Meanwhile, less volatile large-capitalization stocks continue to outperform the small fry, with the S&P 100 up more than 19.5% in 2012 compared to just 16.9% for the S&P 600 Small Cap Index.

Groups that are more economically cyclical have lagged this year, due to continued concerns about global economic growth. Notably, the S&P 500 Industrials Index, a group normally expected to lead a strong market, is up less than 13% this year.

Sticking to defensive groups and large capitalization stocks and favoring companies that offer a significant dividend yield continues to be the preferred course. You won't be forced to give up much (if any) upside, and your portfolio won't be exposed to the extreme bouts of volatility that have characterized the market over the past two years.

It remains unclear when or if this latest round of central bank easing will provide real economic help, but it will take a few months at a minimum for better data to emerge from the US and Europe. Until we see empirical evidence of a turnaround, it's advisable to avoid cyclical groups such as the industrials.

Finally, the deluge of stimulus measures announced over the past few weeks has pushed up inflation expectations. That's great news for prices of oil, gold and agricultural commodities.

This article was written by Elliott Gue of Investing Daily.

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No positions in stocks mentioned.
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