“Boring” Defensive Plays Where the Action Is in This Kind of Economy

While the stock market appears to want to move higher, we may be seeing a shift from high momentum growth stocks like Google Inc. (NASDAQ/GOOG) and priceline.com Incorporated (NASDAQ/PCLN)—which are both trading above $1,000 a share—to the more “boring” names.

The gains made by the momentum stocks have been spectacular so far, to the point where we are seeing overextension on the charts, which are warning of a possible correction.

Cyclical stocks, or those companies that swing with the U.S. economy, appear to be backing off. These include goods and services that are non-essential to the consumer. Spending on these discretionary goods and services tends to fall when the U.S. economy stalls and surges when consumers are spending during the good times, when jobs are plentiful.

Should the U.S. economy falter, you should look at reducing your stock market exposure to cyclical stocks, such as those in the automotive, furniture, retail, travel, and restaurant sectors. When times aren’t so good, consumers will look to cut spending in these areas first to save money.

While the cyclical stocks are continuing to fare pretty well, as shown by the chart of the Morgan Stanley Cyclicals Index below, I believe the stocks will be laggards if the U.S. economy continues to stall.

 Chart courtesy of www.StockCharts.com

What you should look at is the defensive sector. I know these may seem like boring stocks, but should the U.S. economy stall, I would look at these companies to outperform the broader stock market.

Defensive stocks are those companies that deliver steady earnings and dividends regardless of how the U.S. economy is doing. In bad times or when an economy is stalling, as may be the case, defensive stocks will fare better. Of course, this group will underperform when the U.S. economy is growing, which is when you should revert back to cyclical stocks.

Take a look at the chart of the S&P Consumer Staples Select Sector below. There’s currently some hesitation on the chart, but we could see a breakout if the U.S. economy begins to stall.

This article “Boring” Defensive Plays Where the Action Is in This Kind of Economy originally published at Investment Contrarians by George Leong