In less than six months, the market has unexpectedly experienced a drop in stock correlation from one of the highest levels ever recorded to one of the lowest. Just look at this chart within the Russell 1000, courtesy of Nomura:
It indicates that we can finally go back to stock-picking, folks -- for better or worse. We're going to have a real divergence between the stocks we choose to invest in, as opposed to the on/off valve of market positioning where we're either in stocks or out of them.
This might scare many of you, but you have to love the action, even if you don't want to engage in it. The instant competition and satisfaction of finding shares that outperform sectors and index benchmarks by more than a percentage point or two is immensely satisfying, as well as profitable.
It's a chance for me to combine the two theses I have about stock-picking in 2012 in one place.
First, I'm convinced that liquidity from the Federal Reserve (through quantitative easing in the U.S. and the long-term refinancing operations in Europe) is a fixture for the next two years. That, combined with a new directive from the Fed to target inflation, has given new life to the endless bid that I wrote about in my book, Oil's Endless Bid, and here on Real Money.
In other words, commodity prices are heading higher.
The second thesis to target stocks in 2012 involves beta -- the overlooked and maligned issues that didn't pay a dividend and were kicked around by every bad Europe rumor, the Arab Spring and Japan's dual disasters. These volatile issues have underperformed the broad indices in the past year, but they're beginning to look attractive here.
The names hardly matter. There are so many of these commodity names that were also higher-beta, low-to-no dividend stinkers in 2011 that you can create a whole portfolio of them using little more than a Yahoo! (YHOO) stock screener. As I've developed these names into a portfolio, I've mentioned some of them in columns and on Columnist Conversation: Apache (APA), Vale (VALE), Agrium (AGU) and Alcoa (AA). All have been monster outperformers in 2012.
If you missed these 15% to 35% gains since December of 2011, you're not alone. But don't worry -- these are all stocks that should have much further to run in 2012, and now is not the time to be afraid to buy them.
The instinct is to be afraid and wait. If you missed what looks like a parabolic move, fear of buying the top will set in. While I believe a short-term pullback in all of these overperformers is coming soon, you can't be afraid to develop a scale-up/scale down price average in these names.
Neither trend that I'm using to target stocks -- financial easing pushing commodities and overperformance of beta shares -- seems to be stopping anytime soon this year. And it's not too late.
