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Forget Defensive Stocks, Stick With Financials and Cyclicals: Paulsen


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By now, you're likely well aware of the declining rate of weekly jobless claims, that have steadily fallen to their lowest level in 4 years after peaking in 2009. While this weekly statistic has offered investors a nice dose of confidence, at least one pro is looking to them for another reason; stock market indicator.

"Cyclicals (^CYC) tend to do really well as long as unemployment claims are continuing to come down," says Jim Paulsen, chief investment strategist at Wells Capital Management. "Historically, they have tended to outperform until claims get down below 250,000, but I would suggest you stay over-tilted towards cyclicality, or economic sensitivity, until unemployment claims get down below 300,000."

And once we reach this aspired level, Paulsen says it's not a hard sell sign, but rather, an indication that we are getting closer to the end of the recovery, at which point, investor appetite for Defensive stocks will tick up.

For now, while Paulsen predicts the trough in unemployment is a long way off, one of his favorite recovery plays is in Financials (XLF). He's been hurt by the sector in the past, but is all in now and expecting growing consumer confidence to restore this group to previous glory.

"Clearly we have cleaned up the large cap Financial industry dramatically and created a good operational environment for them," he says, adding "confidence is probably more beneficial to the financial industry than any other sector of the economy."

At the same time, Paulsen thinks there are numerous reasons why investors may want to lighten up on one of the market's most popular investment strategies: Dividends (SDY).

"They (dividend stocks) are really closely tied to what the 10-year treasury yield does," Paulsen says, admitting that they've had a great decade, but a reversal is due.

"The thing that drove bond yields down, the best friend of the bond market, has been fear, and it has also been the best friend of dividend stocks," says Paulsen.

Are Financials a better move than Dividend payers right now?