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Shift from “Grocery Store” Stocks to Cyclical Ones

Rotate toward names in materials and industrials for Q2


The dominant theme in yesterday’s trading was another turn of what appears to be a rotation from defensive stocks, like consumer staples and health care, to cyclical stocks like materials producers, energy and industrials. This changing of the guard got started two weeks ago, and it has not been a smooth transition from one phase to the next, but it certainly appears to be for real now.

Here’s one way to look at it: Everything that worked in the first quarter should now be shunned, and everything that was shunned in the first quarter should now be bought. That would mean selling things like Pfizer (NYSE:PFE) and buying things like ConocoPhillips (NYSE:COP). As you can see in the two charts above, the differentials in performance from Jan. 1 to Apr. 23, and then from Apr. 23 to the present are quite dramatic.

Other stocks that were on the move included big financials like Bank of America (NYSE:BAC) and Citigroup (NASDAQ:C), as well as big techs like Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL). The biggest losers today were utilities, possibly in part because they were the largest winners of the first quarter.

Here’s another way to look at it: Sell everything that is found in a grocery store, and buy everything that is used as a raw material or plugs into a wall.

One of the reasons that energy stocks are moving is that tensions in the Middle East escalated over the weekend as Israel launched air strikes into Syria, including direct shots on Damascus on Sunday. The attacks were reportedly directed at Iranian missiles being shipped to Hezbollah in Lebanon. The Syrian government reported that the attacks hit several military facilities and killed dozens of troops near the presidential palace, adding that they amounted to a “declaration of war.” Syria then vowed to retaliate against Israel.

The recent Israeli strikes have intensified fears that violence from the Syrian civil war could spread throughout the region. Both sides of the civil war, as well as Hezbollah and Iran, could become more aggressive as a result. Also, the White House could be forced into more aggressive action as well. And whenever Mideast tensions rise, so does the price of crude oil and oil producers’ shares, as investors worry about an interruption of the flow of supply.

I am transitioning my recommendations to have a more cyclical bent. In this environment my preferred areas are alternative asset managers, similar to Oaktree Capital (NYSE:OAK), as well as selected semiconductors, software makers and energy.

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