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The year is off to a rocky start, with the major averages all taking big hits on Monday. I believe it is going to be a choppy year in the stock market, due to a variety of factors.
We have oil making big news, as crude crashes to fresh multi-year lows. That is generally good for consumers, but it scares a lot of people into thinking that if demand for energy is weak, it’s because the underlying economy is weak.
Then we have the Fed, which ceased its bond-buying program. Some think the end of this liquidity injection will cause bond prices to fall, while others think the whole thing was just a pointless scheme to inflate asset prices.
I also see a lot of stocks that are trading at PEG (price/earnings to growth) ratios greater than 2.0, which suggests that they are not only fairly valued, but very likely overvalued.
So what are the ways to play 2015? It depends on whether you agree with me or not. I think you want to go where the big stories are playing out, and that means energy and broad-market hedging.
On the energy side, you have a couple of very interesting choices. One sector that is very likely to benefit from the slide in oil prices is transportation. Virtually everything that is bought and sold in this country needs to move from wherever it is manufactured to where it is distributed to where it is eventually sold to consumers.
That requires massive industries built around trucks and rail and airplanes to get everything where it needs to go. For years, we’ve been stuck with oil prices that were so high, that the transport companies would saddle us with “fuel surcharges.” Hopefully, that will no longer be the case.
In any event, transportation companies aren’t going to have to spend as much on fuel. They will also use the opportunity to lock in lower prices using hedges, which should help their earnings going forward.
You could buy individual companies, but I instead suggest a basket of stocks like the ones you’ll find in the iShares Dow Jones Transportation Average (NYSE: IYT) ETF, which mirrors the transportation index. Before you jump in, however, give the market a few days to settle down. Monday was so bad that the market took everything down with it, including the transports.
As for oil, I’m not going to speculate about the cause of the crash in oil prices. It happens every few years. What I do know is that oil prices will eventually recover, and that energy is a sector you want to be invested in for the long term. As I’ve written many times, the world will always need oil.
Once again, I’d avoid individual stocks and instead buy the Select Energy Sector SPDR (NYSE: XLE) ETF. You get all the world-class energy names in this diversified basket of stocks. The trick is when to buy it. I suggest you open a position at current prices, but make it about a third of the total amount you intend to commit. I think oil will go lower still before bouncing back, so you can average down.
My final choice is the technology sector. Tech is a bit like energy, in that the world constantly needs to be moving forward, and tech always leads the way. It will go through some tough times, as big names become obsolete and are replaced by upstarts. That’s why buying the PowerShares QQQ Trust (NYSE:QQQ) ETF is the best choice. It mirrors the Nasdaq 100, so you get a ton of stocks to help diversify your position.
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