Nobody Likes It, But this Market Sector Carries the Biggest Stick

The investment that institutional investors (not traders) have been buying in this market with very little growth. It’s a conservative play that, in Mitchell's mind, makes sense for the rest of this year.It’s funny how investor sentiment can change on a dime. An expectation gets created for a solution to a problem, the action occurs, then it’s okay for investors to buy stocks. Institutional investors—or traders more particularly—always do this. It’s the game of the equity speculation business and it’s a reflection of human nature.

The best time to go stock picking and make some new investments is when the market is down. Naturally, it’s the attempt to buy low and sell higher. But, human nature being what it is, nobody likes to invest when the market is in the doldrums. The perception of a stock’s price seems to be more important than the actual value. That is why there is a stock market in the first place—it’s a secondary market that trades based on perception and expectation. Rationality has very little to do with it.

In this market, institutional investors (not traders) have been buying large-cap, dividend-paying equities because there’s very little growth out there. It’s a conservative play that, in my mind, makes sense for the rest of this year.

I’ve been writing a lot more lately about large-cap investing and the market has proven that you can earn big capital gains and income from owning the right blue-chip companies. We are in a new age of austerity and what’s old is new again. I think the big story in the equity market will continue to be with large-caps and their outperformance in relation to the rest of the market and investment risk. For outright speculation in small businesses, I like gold miners, biotech, and select Chinese companies. Other than that, I’d stick with higher-dividend-paying large-caps.

Every earnings season is important, but this one I think is going to make or break the rest of the year. It’s not really the actual growth in revenues and earnings that are important; it’s about corporations making investors feel better about the rest of the year. The market is looking for confirmation that things aren’t getting worse in the economy and that companies will continue to have the pricing power to keep earnings growing.

Expectations for the financial sector are pretty low, so any good news in that group should be met with some solid upside in stock prices. We definitely need to focus on what the railroad companies say about their businesses, as well as industrial companies like those in chemicals and steel. We know that large, international businesses will be saying that growth in emerging markets is helping them out. What’s important here is dividend increases. This will really make institutional investors happy.

I’d say the stock market isn’t undervalued or overvalued. The main market indices are trading where they should be. An S&P 500 Index over 1,300 is important. The financial sector carries the most important weight in the near term, especially in regards to investor sentiment.