Earnings Season: Finding the New Set of Hot Stocks

In my lifetime, there has been a few famous lines exalting maximum effort. I found myself muttering one of them as the market surged Tuesday. "Run stocks...run." I'm like the zealot that sees a religious figure in each corn flake or silhouette from a row of hedges. I get down, but it doesn't take much to get me back on the bandwagon. Of course, it helps when stocks really are cheap. There are a gang of Blue Chip stocks changing hands near single-digit price to earnings ratios.

Sifting through the earnings, things aren't as bad as advertised, save for the financials. Of course, being the illogical creature that it is most of the time, financials are among the most compelling niches of the market. Although there is a logical component to the market, too, the answer isn't always obvious. And when it is obvious it seems too easy. (I'm fond of saying that Mr. Spock would lose a ton of money in the stock market.

Some of our best ideas over the past couple of weeks involve playing crude oil to the downside, such as featuring United Airlines (UAUA) and JB Hunt (JBHT). Then, there is the fact that people aren't buying cars but fixing the ones they already have, so that meant buying Autozone (AZO). Yeah, yeah, I know it's always easy to talk about common sense after the fact and we did send an alert to take profits on AZO. Yet, many folks ignore those kinds of connect-the-dots ideas in favor of the hot stock/sector of the day.

Chasing is fine as long as you're nimble and understand that even within a hot sector there are certain stocks worth riding out and others that are simply along for the ride. In fact, the market is grappling with the idea that maybe there will be a new set of hot stocks that will displace the commodities/agriculture plays. From a fundamental point of view, I think that there is another move to the upside in agriculture down the road, but the comparisons are going to be more difficult.

Then, there is crude oil. I guess the question about whether it was a bubble or not has been answered. I also hope that the notion that as long as speculators were buying crude oil it could only move higher is dispelled, also. I would say that oil bears shouldn't gloat, however, as there is a long-term trend that is still decidedly to the upside.

I still have a considerable amount of angst over the volume. Man, has it been lackluster, all things considered. These rallies really mean little in the long-run until there is wider conviction. We know that the market gets so depressed, like a coiled spring, from time to time. But, like I mentioned the other day, we want the market to crouch and then give us a convincing leap. Nonetheless, we know that there is some demand out there even if the masses are dug so deep into their foxholes they could tap Morse code back and forth on the walls with Osama bin Laden. These days everyone is a cynic (sorry, John McCain, you aren't the only one) and rightfully so if you're frame of reference is only the past year. If you look back a little further in history then you should be salivating at the opportunities.

I think that the big problem is the stomach. Damn, we have become so soft. This notion that life has to be fair and it's the government's job to make it so is the most dangerous trend in the market. It is far more dangerous to the long-term health of the economy than housing or the credit crisis. I digress, as the market had a great session and surely the undecided have to be thinking that maybe this is the spot to jump in. On the other hand, some are waiting for a different kind of leadership before making a move. Many want to see the Fed jump in and raise rates. I can't see it happening before the November elections.

There was a peculiar line in the FOMC statement about inflation being a significant concern. That "say what" line I think was put in there simply to assuage Richard Fisher, the lone dissenter and perma-hawk on inflation, and to also contain enthusiasm for a rate hike. There is no doubt that a hike is in the cards, just closer to the bottom of the deck.

There are many compelling groups but some stand out more than others. The gaming stocks were very attractive, led by Wynn Resorts (WYNN); these stocks are an interesting play. Obviously, those with exclusive exposure to the Las Vegas strip or mostly domestic locations are rolling craps lately. Those with a play in China act better and will probably significantly outperform the rest.

The Dow Jones US Gaming Index closed at the high of the session on August 5th and above the 20-day moving average. A move through 480.0 is a real and tradable breakout.

Retailers are also compelling, but complete opposite ends of the spectrum really rocked. Target (TGT) really stands out because this was supposed to be the odd man out, with products too expensive for some folks and too cheap for others. Cheap chic just isn't playing in Peoria the way it used to. Still, at this level the risk/reward is tantalizing, particularly for long-term investors. Kohl's (KSS) acted great, and looks attractive. On the luxury end, Tiffany's (TIF) perked up nicely, but I wouldn't take the bait just yet.

Restaurants continue to shine. Call it cocooning or the "stay-cation" phenomenon these stocks have been rocking on great earnings. We've witnessed big earnings beats (CEC Entertainment (CEC), CBRL Group (CBRL), and Buffalo Wild Wings (BWLD)) and strong guidance (California Pizza Kitchen (CPKI)), and yesterday I really liked the action in Papa John's (PZZA) and McDonald's (MCD), although I wouldn't pull the trigger on the latter because of tough comparisons.

Written by Charles Payne, CEO and Principal Analyst of Wall Street Strategies (www.wstreet.com) providing information to over 50,000 subscribers. Charles is a regular contributor to the Fox Business and Fox News Networks.

Disclosure: none