Breakout

Mega-Cap Stock Picks for a Resilient Market

Jeff Macke
Breakout

If you wanted to pick a fight, or vigorous debate among stock players this summer tell them stock prices already reflect the horrific global headlines.

Which is exactly what Bob Pavlik, Chief Market Strategist of Banyan Partners perhaps unwittingly did when he sat down with Breakout. "Bad news is already priced into the market," Bob fearlessly offered just prior to Tuesday's explosive rally.

"People say 'what about Europe? What about Greece? What about Italy?" the strategist said, ticking a few items off the grizzly laundry list of headwinds. These may be unfolding global calamities but to market purists like Pavlik stocks have already looked past every one of them. The same goes for the ongoing debt-ceiling debate and just about any other known factor.

If Pavlik's theme sounds familiar it should; this is more or less what Laszlo Birinyi said in a piece we published earlier this week. Even the bears will have to concede, or at least should concede, that stocks have handled seemingly horrible, negative news with relative aplomb. The fact of the matter is stocks are barely buckling, let alone breaking, despite the fusillade of negatives. You can attribute this to what you will, "government manipulation" being perhaps the most popular and difficult to refute theory. Alas, if you're short you continue to be wrong. Besides, the market has been brazenly propped up by the government since at least 2009 and shooting against it has been a lousy bet to date.

Respecting the tape's resiliency isn't the same thing as being oblivious to the implications of the negatives, which is why our man Bob isn't exactly gunning his portfolio way out on the risk curve. He wants to "reduce some of the risk exposure" but remain long via mega-cap Blue Chips. The biggest of U.S. big boys, in other words. Names like Boeing (BA), General Electric (GE), 3M (MMM), EMC (EMC), Time Warner (TWX) have a place in Pavlik's portfolio as he awaits a pick-up in economic activity in the second half.

Before the bears shell him in the comment section, and I know they will, consider a) virtually any sign of a pulse in economic activity in the second half of this year would be better than most expectations, and b) shorting without a specific catalyst is traditionally a terrible trade. Unless China reverts to Communism, Europe falls into the Atlantic and every man, woman and child in America loses their job in the next 3 months it's increasingly hard to see what type of news is going to be bad enough to start a sweeping sell-off. And no, the fact that America is writing hot checks and devaluing her currency at a horrifying rate doesn't qualify; chronic issues are not a short thesis make.

For a change I'm giving a writing assignment to the bears: Tell me something negative, new, and plausible in the comment section. I'm entirely serious. We all know the current headwinds. What will bring stocks down over the final two quarters of 2011 and beyond?

Let the debate begin!

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