Stock picking in a market with very little tailwind makes life much more difficult compared to a bull market. This is obvious. But in any market, there are opportunities in differing market sectors. There’s always the opportunity for short-selling and near-term momentum trading. There’s also the opportunity to build longer-term investments in good companies at attractive valuations. As an equity speculator, you can’t fight the stock market; you can only adapt to the current conditions.
If I were stock picking in this kind of lackluster market for stocks, I’d be focused on momentum plays. I’d rather bet on a stock that’s already gone up with a strong following than make a value trade or bet on a turnaround. This means that I would be consistently making lists of stocks that are hitting new 52-week highs and watching the news wires.
Last year, one of the best market sectors for speculators was gold and to a lesser extent other precious metals. As an investment theme, I think stock picking among gold and silver miners remains one of the best strategies over the next three years. The fundamentals for gold (and silver) are still very much intact. (See Central Bank and Inflation—the Top New Fundamentals for Gold Stocks.) Spot prices for gold and silver have been experiencing a well-deserved correction and, no matter what the individual story, these kinds of stocks always trade on spot prices. While I’d be trading momentum stocks this earnings season, I’d consider stock picking in gold and silver over the coming months with a 12- to 18-month time horizon for investment. The timing is almost right for a reacceleration in precious metal prices.
I think we’re going to see more economic news that shows a relatively strong close to 2011 and this should provide some further stock market momentum, at least for the first half of this year. Individual stock picking is still the key. For the second half, all bets are off—or rather, it’s too unpredictable for a current view.
The European debt crisis remains the financial world’s most serious investment risk at this time. But there is another major risk brewing out there and it has to do with the country of Iran. Western political leadership is ramping up the tough talk on Iran and they are taking action with strong economic sanctions. It’s my fear that this geopolitical threat could derail what I think is a slow and methodical recovery of the U.S. stock market.
Economically, the European debt crisis and the currency instability that this could create present the most serious threat right now. But the geopolitical threat of Iran is just another reason to consider some new stock picking in gold over the next two quarters.
Getting back to stock picking in today’s market. Investor sentiment is strong enough at this time for some decent event-driven trading. Gold and silver prices are likely to keep churning for the next couple of months; then I think it’s probable they will start ticking higher once again and equity speculators can consider some new positions. Stock picking in today’s trendless market is difficult, but the events are out there. Keep the gold trade in the back of your mind for later this year; the fundamentals for this sector haven’t changed.