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How Investors Can Play a Market Pullback

In this week's interview with Toni Turner of TrendStar Trading Group, we discuss identifying opportunities in the case of a market pullback, and what pitfalls investors should avoid.EQ: Last week,

In this week’s interview with Toni Turner of TrendStar Trading Group, we discuss identifying opportunities in the case of a market pullback, and what pitfalls investors should avoid.

EQ: Last week, you mentioned that the Cyprus bailout saga raised concerns that the euro crisis may be back at the forefront of the market. It sure seems like that may be the case now. Do you agree?

Turner: It definitely is, and the markets will be watching what happens when the Cypriot banks in Nicosia open early Thursday morning. If there’s order, then the markets may end up brushing it off. But if there is chaos, and if the situation  becomes more climactic, that will undoubtedly  pressure our U.S. markets. Added to that,  Italy’s political stalemate is coming into the spotlight again and Italian bond yields are starting to rise. Spain still has an unemployment rate of 26 percent. We also have news that Slovenia may be the next candidate for a bailout. So it looks as though the eurozone debt crisis is coming back into the forefront here, and certainly, our markets are going to be aware of that.

EQ: You mentioned that now would be a good time for investors to make a shopping list of stocks they’d like to own at a lower price. What is some advice that you can offer when making that kind of list?

Turner: In Toni’s Market Club, we look for stocks that have what we consider to be a good technical setup—what we call our “Sleeping Tiger” setup.  We’re looking for stocks with good fundamentals, good valuations, and good dividends. We find that during market sell-offs, these stocks do not sell off as quickly. So we don’t wake up to a morning gap down as much as you would with a big growth stock that does not pay a  dividend.

Right now, we’re in defensive sectors, which is appropriate for the current climate. Protecting your gains and your principal in times like these is much more important to me than actually looking for big gains. This is the time when I look to conserve the profits that we’ve made. We had a nice run, let’s not give our profits  back. So we look for good chart patterns, good fundamentals and strong dividends, as well as for stocks in defensive sectors. That means  we’re avoiding  sectors that have been shown too much love recently by investors.

Right now, for instance, in Toni’s Market Club, we like Altria (MO), which has a nice set up and is a defensive stock that pays a very good dividend. As well, it’s  defensive, as a Consumer Staple. We’re also looking at Intel (INTC), which is a Dow component. We consider these traditional tech stocks that pay a good dividend as defensive plays. More established tech companies like Intel and Microsoft (MSFT) can be considered defensive because they are steady players with big cash on the balance sheet, pay good dividends, and they are not as volatile as some of the more cyclical and speculative new tech companies.

EQ: On the flip side, when you’re looking for opportunities on a pullback, you don’t want to be stuck with falling daggers or that is declining because there is something fundamentally wrong with the company. What are some things you try to avoid?

Turner: A lot of growth stocks don’t pay dividends and have relatively high P/E ratios. So when these rise along with the tide that most stocks have risen on since coming the November lows, maybe they deserve to be trading at new highs,  or maybe they don’t. Maybe they’ve just been swept up by the tide of near-euphoria that this market has experienced in the last month. I’ve seen literally hundreds of stocks in my scans that have risen into  nosebleed territory and they are highly overbought.

Right now, for example, many  stocks that are absolutely adored could sell off quickly. I’m talking about some transportation stocks, like the airline stocks, which have been driven up to big new highs. I would be careful right now and stay away from those. The Guggenheim Airline (FAA), which is the airline ETF, will show you how overbought they’ve become, at least in the short term.  We won’t take on new  positions in stocks that are trading at high multiples or are overbought, and are trading 15 to 20 percent or more above their 200 DMA.

  If we do have a pullback in this market, and it may come soon, I don’t want to be looking at the profit taking that would take place with these overbought stocks. At present,  I’m going more defensive.

EQ: For more sophisticated traders or even for investors who want to hedge, is now a good time to look at shorting opportunities as well?

Turner: Definitely, and there are quite a few out there in the retail industry group. We’ve noticed the price of cotton is moving higher here, and that could bring in margins for a lot of the retail apparel companies. We’re looking at ANN, Inc. (ANN) as a quick short-term trade, and in fact, that has already fallen the last few days. It may be late to to short ANN now, but it’s an example of retail stocks that have felt some pressure.  As well,  if consumers pull back because their paychecks have been dinged since the start of the year with rising taxes and gas prices, there could be a lot of shorting opportunities in these apparel stores and retail stocks in the context of a market pullback.

EQ: What sectors or stock groups are you watching right now?

Turner:  I waited for the Energy Select Sector SPDR (XLE) to pull back, and it kindly did so. The top holdings in that are Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), Schlumberger Limited (SLB), and Occidental Petroleum Corp. (OXY). Exxon is moving up, finally, after going sideways forever—I wrote an article on that for Marketwatch (link) on that. I’m keeping an eye right now on the XLE. If it goes over the March 2011 of $80.97 resistance point, it has room to run to $90. On Wednesday, it closed at $73.54.  The price of oil right now is rising, of course, so is natural gas. I’m also watching the iShares Dow Jones US Oil Equipment Index (IEZ). If it can hold here and not move back down below $55.50, I think it has room to go up to $60.

I’m pro-renewable energy. But I’m against worshiping any technology and blindly glossing over its drawbacks.