Rules of the Game: Setting Up for 2013

 | Dec 21, 2012 | 7:00 AM EST
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A big topic this time of year is getting set up for the coming 12 months.

This week, I wrote about some of the biggest price movers of 2012, stocks that could be setting up for further gains into 2013. But how about those names currently consolidating, perhaps setting up for the next move higher?

Moving-average support and sector strength are two of my preferred methods of sifting through investment ideas. With the former, I want to see support at either the 200- or 50-day line. When it comes to sector (or sub-sector) strength, I'm looking for an industry that's gaining investor support, not hoping that an out-of-favor area will bounce back.

Along those lines, I'm looking for large-cap portfolio anchors that I may rotate into during the early months of 2013. Midday Thursday, I ran a scan of large-caps getting 200-day support. Then I sorted according to sector. While there were plenty of energy and health care stocks with strong fundamentals getting 200-day support, the financial sector names caught my attention. It is showing the best year-to-date gains in the S&P 500, up 26% as of Wednesday's close. Quarter to date, the sector is up 5.1%, and month to date that figure is 4.4%. Those numbers also lead the benchmark index.

One of the names that met my two criteria of 200-day support and sector strength was Discover Financial Services (DFS). The credit-card issuer lags industry peers Visa (V) and MasterCard (MA), both fundamentally and technically. Discover is down 8.3% so far this month. It gapped down 4% Thursday, as fourth-quarter earnings missed views, and costs were on the rise. It's not unusual for a stock to tumble on disappointing earnings and then rebound -- or at least stabilize -- in subsequent sessions as value-oriented investors spot an opportunity. The stock has advanced 60% thus far in 2012. After rallying for six straight months, December is the first down month. At this juncture, a pullback to the vicinity of the 200-day could be constructive and could provide opportunities for entry.

Another name that made my screen was Dow Jones Industrial Average component American Express (AXP). This stock has been gradually consolidating since May, and is currently trading just below its 200-day line. The company reports its fourth quarter Jan. 17, with analysts eyeing earnings of $1.06 per share on revenue of $8.12 billion. That would mark a year-over-year increase on the bottom line, but a decrease on the top line. As a DJIA and S&P 500 component, the stock will always be widely held and found in numerous exchange-traded funds and mutual funds pegged to indices. For the moment, it may remain in a holding pattern until earnings serve as a catalyst for a move in either direction.

Finally, a little-known institutional advisory firm, Federated Investors (FII), also made the cut. This stock has a market cap of $2.1 billion and it trades more than 1 million shares per day. Though this is also a benchmark index component, Federated is a volatile stock, with a beta of 1.27. It currently has a high dividend yield of 4.7%. Last week, Federated found support at its 200-day line and rebounded. As of Thursday, it was treading near $20.50, about 4.9% above that line. Because of the volatility and the lower liquidity relative to its S&P 500 peers, this would not be among my top picks now. It may be of more interest to active traders than longer-term investors seeking a portfolio anchor.

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