Stocks’ healthy behaviour and a possible 'Pair Trade'

I repeat myself when I write about the need for stocks to consolidate. Consolidation is what seems to be occurring as stocks are neither moving up nor down in any big way. In fact, a slight retracement say to 12,450 will be healthy and create sustainability for the current up move.

The good news is there is an underlying bid to stocks. Bulls can be seen prowling around freely. The bulls were given a positive signal by CAT and MMM results, which far exceeded expectations. However, there were a few misses too and housing numbers were not good.

According to Thomson Reuters data, 59 percent of the 152 companies in the S and P 500 that have reported earnings beat analysts' forecasts. That is down from the 70 percent 'beat' rate in recent quarters at this stage.

The big picture is that the economy heads in the right direction but very slowly. Some individual companies are having a tough time. Investors must select companies and sectors carefully.

The Dow Jones industrial average was down 22.33 points, or 0.18 percent, at 12,734.63. Down volume was almost twice up volume while advancers and decliners were almost evenly matched. Ten year money yields 1.93 percent while the VIX settled at 18.6.

It is difficult for me to enter into any long trades when most stocks are at resistance levels threatening to break into a new trading range. Likewise, I do not wish to sell stocks short for the same reason.

Stocks

XLE: The energy ETF is a laggard relative to indices such as the DJIA and SPX. XLE is nowhere near its 52 week high. A sector 'pairing' bet on XLE relative to a more expensive energy stock company is worth exploring, i.e. buy XLE and short say XOM (which is already at 52 week highs). Such a 'pair trade' requires XLE to appreciate more than XOM to be profitable.

XLF: Like its energy counterpart, the financial sector ETF has underperformed diverse stock indices like DJIA and SPX.

That both indices are well below respective 52 week highs suggests that there is a good likelihood that stocks have more room to appreciate, after a decent period of consolidation.

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