Stocks Hit New Highs: What's Next?

 |  Includes: DD, ETN, GLD, IAU, MAN, SKF, TBF, TBT, TRW, TSM
by: Steve Reitmeister

The headlines now read “Stocks at 2 Year High!”

Why are we making new highs? Because the economy is improving, which raises corporate earnings, which raises stock prices.

Will this continue? The answer is yes if the economy stays on its current positive trajectory. The answer is no if things take a turn for the worse.

As I have discussed many times before, the better odds are on things improving. And as I have shared just as often, it will stay on that path unless there is some shocking event (all the usual suspects; Bank Failures, Government Debt, Terrorist Attack, Cubs Win World Series etc.)

So the above sets the basic strategy to be heavily weighted in stocks. Even more so than usual because bonds are no longer an attractive alternative with rates on the rise after 30 years going in the other direction.

Yet one should not be without some defensive elements at this time. If you are concerned about the banks, then own an ETF that shorts the banks like SKF.

If you are concerned about government debt getting out of control, then short the long bonds with ETFs like TBF and TBT.

If you are concerned that the Fed is flooding the world with too many dollars and will create inflation, then TBF and TBT are still a good idea (because this creates inflation which creates higher rates). Or consider owning gold with GLD or IAU.

The trick is to figure out how much protection you want because if you have too much, and the economy and stocks stay on this upward path, then you will underperform. So that is a personal choice that no outsider should make for you…because you are the one who has to live with the outcome.

So dig deep to find the balance of these things that you are comfortable and make the necessary trades.

Take 5

This is where I share 5 of my favorite stocks that all have a coveted Zacks Rank of 1 (Strong Buys)

  1. Du Pont (NYSE:DD): Emerging markets are devouring resources. Not just oil and copper…but chemicals too. Du Pont is right in the thick of most of these improving trends. And a 3.4% dividend certainly sweetens the deal.
  2. Eaton (NYSE:ETN): Industrials are some of the strongest players these days as they are seeing a big cyclical upswing in activity. Eaton’s earnings estimates are dramatically on the rise and investors are taking notice.
  3. Manpower (NYSE:MAN): Most employment indicators in the US are pointing towards improvement. No wonder this leading staffing firm is making new highs with most analysts calling for more upside.
  4. Taiwan Semiconductor (NYSE:TSM): Large semi firm enjoying the industry wide growth. Here you get nice growth with large cap security plus hefty 3% dividend. Not a bad trio.
  5. TRW Automotive (NYSE:TRW): Wordwide auto demand is on the rebound and gaining steam. Parts makers like TRW continue to flex their earnings muscle and investors are rewarding them with higher share prices.

Disclosure: I am long SKF, TBT, MAN, ETN.