Large-caps, Gold & Biotech; Where All the Action Is

There are very few stocks that are actually doing great in this market. If the main stock market averages go up, it’s mostly because of large-cap, dividend-paying stocks that are more heavily weighted. There is an opportunity in this kind of market, however, for momentum trading, particularly if you have a stock that’s already gone up and is trading right around its high. Because so few stocks are what you’d consider to be outperforming, larger traders are rallying around these kinds of positions due to the fact that there are so few in the marketplace at this time.

For the most part though, trading action in equities can be considered quite muted in the absence of a defined trend. The story continues to be about large-caps and will likely remain this way for the rest of the year.

Stock picking in this kind of environment is tough for new positions, especially before a new earnings season begins. That’s why there’s no rush for investors to consider new positions as far as I’m concerned. Event-driven trading will soon be upon us and speculators should look for corporate visibility that beats previous estimates. It’s unclear how much appetite the broader market has for upward price moves in stocks, but I think it’s reasonable to conclude that a lot of investors have been sitting on the sidelines during the lull between earnings seasons.

The gold and biotechnology sectors are some of the best areas in this market for risk-capital speculators. I don’t see the spot price of gold following the trend in the oil market, and biotechnology always trades on its own news (discoveries, drug approvals, etc.) regardless of sentiment. But, as we all know, there’s no wind at our backs. It’s not that kind of market at this time and there’s no catalyst for investors to rally around. That’s why earnings season can’t come soon enough.

The stock market’s already betting that the technology sector will underperform in the second quarter. A lot of investors also aren’t expecting much from large financial institutions, which still have a lot of bad debt to deal with on their books. Again, the most important index to keep an eye on is the Dow Transports. This is the single best benchmark for the stock market’s overall health. If the railroads begin to fall apart, then so will the rest of the stock market and the economy.

With the economy slowing down, anything is possible over the coming quarters. This means that we could experience another technical recession. One thing I don’t expect is runaway growth, because the fundamentals just don’t support it quite yet. The economy hasn’t corrected itself from the housing meltdown and, in my view, it can only really accelerate in a sustainable way once the excess inventory in the system is taken up and real estate prices move higher. This is why large-cap, dividend-paying stocks will be some of the best performers in the stock market. There isn’t enough economic growth for big capital gains just yet.
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