Market Grinds Out Small Gain on Mixed News!

It was an up and down week as the Market grinded out a small of .3%. However, it could have been worse had the market chosen to embrace all of the bad news. European debt concerns weighed on the market, while FedEx, a barometer for shipping, delivered a negative earnings surprise. Best Buy also delivered disappointing earnings, although the overall retail sales report was the exception with results that were much better than expected. There was enough bad news this week to drive the market lower, particularly in light of the strong run the market has had since September. The fact that the market was able to close with even a slight gain is testament to the strength and resiliency of the current market. Another sign of investor confidence was volatility, as measured by the VIX, which fell sharply as the quadruple witching hour came to a close with the quarterly and yearly expirations of options and futures. The year 2010 has been a good year for stocks and we expect 2011 to be even better as economists raise their 2011 GDP guidance and Americans enjoy extensions of their tax cuts. However, in our view, the key driver to watch is the money flows into stocks. We are seeing increases in net money stock flows and expect that trend to accelerate in 2011, driving stock prices higher. Corporations are in the best financial shape they have been in quite some time and that too provides excellent support for stocks. We continue to beat the market in both equity portfolios and expect to finish the year strong despite not being fully invested. We added to our stock positions last week with the purchase of Westlake (WLK, Chemicals), a manufacturer of basic chemicals, vinyls, polymers, and fabricated products. The stock has had a strong 6 month price run, but the stock remains cheap with a PE of just 18 relative to sales growth of 31%. Westlake has terrific operating margins relative to competitors and that will keep earnings growth very high. In our equity portfolios, we plan to increase our stock allocations over the coming weeks in an effort to be fully invested in 2011. In our options portfolio, we also purchased a Mar Call spread in OM Group (OMG, Chemical Manufacturing), a provider of specialty chemicals, advanced materials, and electrochemical energy storage solutions. Industrial demand is expected to gain momentum and that will help propel OMG stock higher. We bought the call spread instead the stock to take advantage of attractive option prices. We bought the $40 Mar call and sold the $45 with the same expiration to create the call spread. We make money if the stock rises by just 6.5% by Mar expiration and can make as much as 200% on our position if the underlying stock rises by just 15%, an excellent risk return tradeoff. With volatility dropping to low levels, this is also a good time to buy portfolio protection since lower premium prices makes buying this insurance much cheaper. We did just that last week by purchasing a Feb put spread against S&P Index (SPY). We bought the $118 Feb SPY put and sold the $112 Feb SPY put for what was only 96 cents per share. In short, we bought enough options to fully protect our portfolio if the S&P index drops between 5 and 10% by February expiration. We do not expect a price drop, but bought the insurance since option premiums were low. Remember, this is insurance and we do not expect to make money on this position. All in all, now is a good time for year-end portfolio housecleaning and to get fully invested for next year.

Momentum And Value (MAV Screen): Breakout Stocks To Buy!

What Stock Tips do we have? To our watch list, we added three new stocks to buy and one new stock to short. Arrow Electronics (ARW, Electronic Instruments) provides products, services, and solutions to industrial and commercial component manufacturers. The stock is cheap with a PE just above 10 and carries sales and earnings growth more than double that valuation. Entegris (ENTG, Capital Goods) manufactures and supplies materials for the semiconductor and high technology industries. Entegris is a low priced stock at just $7.33, so investors could see outsized percentage gains when this stock takes off. The semiconductor cycle is beginning to rebound and Entegris is well positioned to benefit with likely strong price appreciation. TRW Automotive (TRW, Auto & Truck Parts) is the last new buy stock we added and is a diversified supplier of automotive systems and components to the original equipment manufacturers and aftermarkets. The Auto & Truck Parts sector has been one of the best performing sectors over the past 6 months, a trend that we expect to continue as valuations remain compelling. TRW trades at a PE of just 8.6 versus sales growth of 27% and triple digit earnings growth. We do not expect the company to maintain that torrid pace of earnings growth, but do expect EPS growth in the 20 to 30% range. That is still tremendous growth for a stock trading having a PE under nine! We also added one new stock to short, Focus Media Holdings (FMCN, Advertising). The stock is trading at $21.92 after dropping nearly 10% over the past month. The next support level for the stock is $17.50, so the stock could easily drop another $4 per share. Fundamentally, this stock is overvalued with an astronomical PE over 100. Any little thing could go wrong which could cause this stock to plummet further. Shorting the stock outright or buying put options is the way to position this stock. For our complete list of breakout stocks see below. Overall, the market remains strong and represents an excellent time to get fully invested.

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