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Rally a "Mother of All Head Fakes?"

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By Motley Fool Staff
October 6, 2009

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Is the market's huge rally since March the "mother of all head fakes," or can we all rest easier, at least a little, knowing that we're on the path to economic recovery? We put that question to some of the top performers from our Motley Fool CAPS community of more than 140,000 investors. We also asked for their best and worst stock ideas in the near term.

Make the call. Which will we see first? S&P 900 or S&P 1,100?

Anticitrade: S&P 1,100. I make this call despite a brutal week in the market. In my opinion, the magnitude of the market fall we saw in the early part of this year reflected fear of the unknown. The subsequent rally has been a correction from the earlier overreaction of the market. Although I expect more drops during our slow climb back to 1,100, I do not think they will be substantial enough to put us below 900.

GoodVibe: S&P 900. In my CAPS blog, I made the call that a major top is in place at 1,080! There is a great need for a substantial pullback to burn out the market's overbought condition. That said, based on my technical analysis, I have no doubt that the rally is strong and solid. Wide participation, money flow, breadth, and momentum are all in place and point to continued strength from lower levels. I am well aware that the current state of the economy doesn't match the market expectations, but the economy is always a laggard to the stock market.

5Categories: S&P 1,100. Substantial declines hinge on three things: overconfidence, sudden widespread unanticipated fear, and a fundamentally weak economy delivering increasingly bad news. With these factors in play last winter, the market overreacted in falling to 670. Since then, however, conditions have improved, and it is unlikely that new economic news will come out that is worse than Q4 2009 and January-February 2010. Overall, the market is still very slightly oversold, but much more balanced than in the recent past.

What companies, sectors, or industries do you view as the best or worst opportunities in the market today? Why?

Anticitrade: My long-term industry call is health care -- specifically, managed-care providers. While there are plenty of obvious reasons to be wary of this sector, allocating a small percentage of your portfolio to it may be a very lucrative choice. My valuation of the market suggests that this sector has been overly discounted from a risk/reward perspective and likely will provide abnormally high returns for investors who can stomach the risk. My favorite picks in this group are Coventry Health Care (NYSE: CVH) and Healthspring (NYSE: HS).

Additionally, I favor the energy sector as a long-term call. These were some of the hardest-hit companies in the market this past year, and I think some continued correction is necessary before we see a fair price for many of these companies. My current favorite pick in this sector is Eagle Rock Energy Partners (Nasdaq: EROC).

GoodVibe: In a time of uncertainty and market upheaval, I believe that investors should play it safe from here until the sky is clear again for more aggressive approaches to investing. Besides cash and cash equivalent instruments, I believe large caps and consumer staples that pay stable and good dividends are the best place to park your money. Companies like General Mills (NYSE: GIS), Kraft Foods (NYSE: KFT), Campbell Soup (NYSE: CPB), and H.J. Heinz (NYSE: HNZ) are fair examples. Any company that cuts or reduces its dividend should be immediately excluded from any prudent investor's portfolio. And I won't touch financial, retail, beta stocks, junk bonds, or consumer discretionary with a 10-foot pole. Chasing capital gains in these market segments can prove reckless and outright lethal to your financial wealth.

5Categories: First, let me say that my approach analyzes tendencies and portfolio selection, never relying on a single industry or company. In identifying the strongest companies, sectors, and industries, I analyze the financial metrics that are most predictive of future stock returns: momentum, growth, value, risk, and analyst estimates. The following sectors, industries, and stocks represent the highest tendencies to outperform based on my scoring across all five predictive-metrics categories:

  • Sector: Financial services. For example, Blackstone Group (NYSE: BX), Visa (NYSE: V), and American Express (NYSE: AXP).
  • Industry: Manufactured housing and RVs. For example, Thor Industries (NYSE: THO), Drew Industries (NYSE: DW), and Winnebago (NYSE: WGO).
  • Individual stocks: Gannett (NYSE: GCI), AutoZone (NYSE: AZO), and NVR (NYSE: NVR).

Given the market volatility of the past year, many of the tenets of investing have been called into question. Have you changed your approach during the past year?

Anticitrade: I think the market has provided investors with a tremendous learning opportunity over the past year. This experience has caused me to evaluate my methods and verify that I am making investing decisions based on my competitive advantage (quantitative analysis) and not on my weaknesses (speculation).

When you are experiencing success as an investor, it is easy to transform a disciplined analytical process to one based increasingly on personal speculation. Consequently, when burned on an investment, I evaluate my reasons for initially buying it and try to adjust my system to avoid making that same mistake in the future. Finally, it is important to avoid learning the wrong lessons from this market. Although most Fools have no particular advantage at predicting the quick moves in the market, many have abandoned the careful selection of stock picks in favor of risky bets on leveraged ETFs. [You can learn more from Anticitrade by visiting his CAPS member page. For more free stock picks based on Anticitrade's automated quantitative system, visit http://www.anticitrade.com/.]

GoodVibe: I am a technical trader at heart, although one day soon I expect to be a long-term investor when the market finds solid footing -- so that I can start buying and holding forever. Last year was extremely profitable to me and solidified my unwavering conviction in the value of technical analysis to make investing and trading decisions. If you would like to know how I not only protected my wealth during the past two years but also greatly benefited from it, I will be happy to show you the way and hope they will add some value to your thinking and decision-making. [You can visit GoodVibe's blog on CAPS or visit his website, http://www.iamgv.com/.]

5Categories: The past year has shaken up tradition and called into question the long-term answer of buy-and-hold. There is a difference, however, between buying and holding individual companies long-term and "buying and holding" a portfolio strategy. My personal bottom line is that I was +2% in 2008 and am +59% year-to-date in 2009. So yes, I am still confident in my system and approach. [To learn more about 5Categories' approach to investing, visit his blog on CAPS or 5Categories.com.]

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