5 Trading Ideas Overshadowed by the Twitter IPO

It’s undeniable that a big tech IPO like Twitter (TWTR) is noteworthy. The buzz from consumers and investors alike makes these initial public offerings a staple on cable news programs — even those without a financial bent.

And when you have an IPO like Twitter that gaps up 73% above its offer price on the first day of trading, it sucks even more oxygen out of the room.

But if you were tied to your tablet watching the countdown to Twitter’s pricing and IPO and then surfing all the related punditry on whether it was a good or a bad buy, you might have missed some very important developments elsewhere on Wall Street.

Here are five important headlines and related trading ideas that were overshadowed by the Twitter IPO frenzy last week:

U.S. Equities Look Bullish

Sure, the U.S. stock market has been on a tear so far this year. But if you think that has been cooling off lately, you haven’t been watching the news. Here are some headlines you might have missed:

The Dow Jones Industrial Average notched new record highs last week
U.S. GDP grew faster than expected with 2.8% growth.
Hiring was strong in October even amid a government shutdown.

The macro news out of the U.S. was very strong last week, indicating that October wasn’t quite so bad that many had expected given the shenanigans in Washington.

This could be another nail in the coffin of the stock market bears who think this rally is going up in smoke. And if that’s true, Twitter isn’t the only stock that’s got momentum on its side.

If you want to play this trade broadly, the best way is to simply buy the market broadly — via the SPDR S&P 500 ETF (SPY) or any other index fund pegged to a major U.S. index.

The Dollar Snaps Back

Along those lines, recent strength in the U.S. dollar seems to indicate that global investors are very confident in the strength of the American economy’s gathering momentum.

After the U.S. dollar’s big strength across the past year, the buck broke down in October to bottom at its lowest level since February. But if you weren’t watching the dollar during the Twitter IPO carnival, you might have missed a heck of a snapback in the greenback.

A report from Bloomberg stated, “Pension funds and institutions bought the most dollar-denominated assets in late October since at least January 2009” and the U.S. Dollar Index rallied almost 3% in a week’s time to get back to late-September levels in a snap.

So how do you trade this?

A stronger dollar environment will ultimately keep commodity costs lower, since energy and food and materials priced in U.S. currency are more affordable when the greenback is strong. Check out the return of $3 gas in some states as proof of this ceiling on commodities.

That ceiling is good for manufacturers, but bad for a company like Exxon Mobil (XOM) that gets a lower price for oil and gas in this environment.

A strong dollar also creates headwinds for U.S. based multinationals that will see unfavorable currency exchange rates drag on their foreign sales and profits. The impact isn’t dramatic, but in this environment where every penny of EPS is hard to come by for some corporations, it’s noteworthy that global players like Coca-Cola (KO), Procter & Gamble (PG) or Microsoft (MSFT) will see pressure in a strong dollar environment.

To hedge if the dollar keeps rising? Well, you can always buy the Dollar Index itself via the PowerShares U.S. Dollar Index (UUP) exchange-traded product.

M&A Hunt Continues

The tech IPO market is hot, but these aren’t the only big market deals going on.

Consider Toll Brothers (TOL) and its $1.6 billion buyout of Shapell Industires, immediately on the heels of Tri Pointe Homes (TPH) forging a $2.7 billion alliance with a Weyerhaeuser (WY) division.

This is on the heels of a massive $7.2 billion buyout of electronics firm Molex (MOLX) by Koch Industries in September and a host of other massive deals earlier in the year — led by the $28 billion Heinz buyout orchestrated by Warren Buffett and Berkshire Hathaway (BRK.A, BRK.B).

Last year there were only seven deals worth more than $5 billion, yet in 2013, we’ve already seen six that are worth $10 billion-plus — showing that big-ticker mergers and acquisitions are en vogue.

What does this mean for traders, then?

Well, buying small caps in the hopes of buyouts is one way to play this trend — though instead of picking individual companies, you might be better served by casting a wide net with small-cap funds.

Biotech is always red-hot when it comes to M&A, so the SPDR S&P Biotech ETF (XBI) is a good sector to camp out in. Otherwise, you might want to broadly play small-cap buyout targets via a fund like widely held iShares Russell 2000 Index (IWM).

Hope in China

China’s manufacturing sector continues to bounce back. We just learned in the last week or so that China PMI came in at the strongest level in 18 months.

And bigger-picture, China GDP expansion accelerated to 7.8% in Q3. That’s up from 7.5% in Q2 and bringing growth rates to 7.7% for the first nine months of 2013 — above expectations.

China exports also surprised to the upside, showing that demand abroad is growing nicely thanks to recovery in Europe and America as well.

Yes, in September and October we saw a lot of trouble for Chinese equities as domestic stocks continued their outperformance. But many analysts are starting to change their tune about how oversold China is and how there’s starting to be some signs of upside.

Trading China is best done by ADRs — or Chinese equities that trade domestically on U.S. exchanges — because that means these companies must meet the same regulatory hurdles as American stocks like Walmart (WMT). Some picks to consider if you believe in a cyclical recovery in China would include state-run oil giants PetroChina (PTR) or CNOOC Ltd. (CEO).

Of course, instead of picking individual winners, you can always go broad with a China ETF like the iShares China Large-Cap ETF (FXI).

Fear of a Market Meltdown

It wouldn’t be fair to paint a picture of nothing but optimism. One of the growing trends across October and the first week of November has been the increase in bearish commentary among financial pundits.

Anthony Mirhaydari says the technicals don’t look good for the market right now as breadth declines and downside pressure increases.
Larry McMillan said the market is overbought based on put/call ratios favoring sellers, not buyers.
Societe Generale called for a 15% correction in the stock market in the first quarter of 2014.

The list of bears goes on — notably with the dozens who continue to voice fears that a December “taper” by the Federal Reserve could take the momentum out of the market.

You can understand the perspective of the bears even if you don’t agree with it. Corporate profits are slowing, revenue growth is hard to come by and it’s undeniable that the Federal Reserve’s easy money policies have boosted the market — and a significant drawdown in stimulus could rattle traders.

So whatever trades you consider making in November, keep in mind that the bullishness around the Twitter IPO might not translate broadly to the market.

If you want to trade a selloff, consider taking partial profits in some of your big winners — or even playing the downside with an inverse ETF like the ProShares Short Dow 30 ETF (DOG).

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he had no positions in the stocks mentioned. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.