Keep an Eye on Cyclicals

 | Jan 03, 2012 | 4:18 PM EST
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Every year we get a rush into the cyclicals right at the beginning of the month. It is a "hope springs eternal" sort of thing where we decide that the estimates must go higher because things must be getting better.

It's the kiss of death for the group because the bar gets raised too high.

One of the byproducts of this move, the collateral damage, is a selloff in the staples -- kind of a "who needs them?"

That's playing out, too, with a selloff in McDonald's (MCD), Altria (MO) and Colgate-Palmolive (CL). These stocks have had huge runs, so the profit-taking makes some sense.

Typically, the cyclical move is halted by Alcoa's (AA) failure to execute and its downbeat projections, something that I think is most likely going to happen again. Plus, currency's going the wrong way and Europe is headed into recession.

The soft goods return to the fore after the selloff is complete -- and often times not until after -- and people ask, "What was I doing not buying Colgate under $90 or McDonald's under $95?"

Of course, this is all animal spirits talking. The idea that the cyclicals can maintain this pace is a little fanciful, although the selloff in the staples can take longer to play out unless some bond auction in Europe goes badly.

So, watch this trend. Watch to see if the soft goods trade down hard. They can be a great place to be when they give you a bountiful yield or when the fundamentals continue strong, despite what might turn out to be weaker economic data here or abroad.

I am more inclined to like the domestic cyclicals and spending plays because of strengthening employment here, but weak employment there will be the ying and the yang of 2012, even as people want so badly to stop talking about Europe.

We will stop talking about it when it's fixed, which means issuing equity, crunching debt and getting good growth. Those, right now, seem to be far, far away in time.

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