Post-QE3 Sector Strategy: Separating the Haves from Have-Nots

It is arguably the most picturesque moment in sailing: A fleet of boats, their colorful spinnakers billowing, racing across the water beneath a bright blue sky. Not only does this moment mark the height of their speed, but it can only happen when the wind is at their backs.

In many ways, the stock market is having its spinnaker-moment right now, with an unprecedentedly accommodative central bank now at our backs and seemingly nothing out in front of us, many investors would argue the conditions are ripe for a good run. Like sailing, choosing the right line (or route) in the market can make the difference between winning and losing. Right now Peter Kenny, managing director at Knight Capital Group, thinks those sectors that have policy and demand exposure will continue to lead.

“There are two currents at work in the miners, metals and commodity sectors,” Kenny says in the attached video of the industry group’s market-topping performance lately. While these recent gains have been ”predicated upon policy,” he points out that they will deliver a second pop if and when China catches a bid. “It’s a sector you have to look at.”

Similarly, he is also eying the ongoing improvement in what’s known as the wealth effect and thinks that the reality of rising stock prices and home values will also bode well for the Consumer Discretionary (XLY) sector, and more specifically, the retailers (RTH) and Real Estate name within it. A quick look at the leader board of the sector over the past few weeks reveals discretionary index members like Pulte (PHM), DeVry (DV), Wynn Resorts (WYNN) and Staples (SPLS) to be among the leaders this month.

“Clearly real estate has caught a bid in pockets of the country,” Kenny says, predicting — as the Fed does — that the one-two punch of rising home prices and stocks at a five-year high will get people buying.

He’s also recommending that investors stick with oil and energy (XLE), as they are currently benefiting from a Fed-induced weak dollar, as well as from the heightened tensions in the Middle East. “As long as we have the middle east in play, that’s a factor that’s going to add 10% to 15% to the price of a barrel of oil,” his work shows. If and when China’s economy shows any stabilization or growth, “it will only add more fuel” to the global GDP demand story.

As for the tech sector (XLK), Kenny says there’s an “innovation cycle” underway that goes way beyond Apple’s (AAPL) new iPhone and is not only driving growth in the group but ”dovetails” with his discretionary call too. With the holidays just around the corner, he says there is a lot out there to fuel spending.

Finally, Kenny says financials (XLF) are “in a sweet spot” when it comes to an accommodative Fed and low rates.

“This is a window for them (financials) that was opened again by the Fed to make money on spread,” he says, pointing out that they still have the most to gain since many banks and insurers are still trading more than 50% below their previous high levels from 2007.

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