After ripping 14% higher from June until the first week of October, stocks ran headfirst into a wall of worry seemingly too large to climb. Europe, China, the fiscal cliff, etc aren't new concerns but that doesn't mean they aren't real. Investors suddenly care and are behaving accordingly, selling some of their more aggressive names and rotating into defensives.
"It's a good time if you've got some cash on the sidelines to be selectively getting in," says Simon Baker, CEO of Baker Ave Advisors, about the dark mood on Wall Street.
Don't Be Defensive
Consumer staples (XLP) and defensive stocks, normally where investors go to ride out economic storms, are already overplayed as Baker sees it. He wants cyclical stocks, betting against the herds looking for a double-dip recession. Financials (XLF), health care (XLV), technology (XLK) and materials (XLB) are where he wants to be at the moment, though he's not making any promises for the future.
"Don't get married to these stocks," he hedges. There's nothing wrong with having cash. Whether that means taking quick gains should the opportunity present itself or keeping a tight stop on buys to control your downside, Baker isn't going to get long these groups with the intent to stick with them forever.
Stay Out of the Old, Get Into the New
Not all tech is created equal. The semi-conductors (SOXX) have been a mess all year and it's getting worse. Intel (INTC) has guided lower as has its weaker little brother, Advanced Micro Devices (AMD). Baker isn't looking to be a contrarian in the space. "Stay with new tech; Apple (AAPL), Amazon (AMZN), and Google (GOOG)" he offers, ticking through of the most beloved stocks extant.
"In this type of market I don't want to be too contrarian," he says. It's a market for the nimble and the bold. He's not getting paid to wait; he's making money getting long ahead of the masses. Right now the environment is one of building fear; Baker wants the other side of the trade before traders reach back to the old familiar tech winners.
One last catch. Baker isn't betting on hunches ahead of earnings. He's staying nimble but not rushing. Wait for earnings, listen to the executives, then take your shot. As America gets more fearful into the election and the New Year, making money will require just a dash of prudent bravery.
- Simon Baker