Fear vs. leap year

BOSTON (MarketWatch) � Suddenly, like a cold front lifting, the markets at home and abroad have been springing to life.

From better-than-expected jobless claims, correlated bumps up in the housing market, expanding manufacturing activity here, Germany, China and elsewhere, inflation in check and lending rates at historic lows, and earnings revealing better bottom line management and top line achievements which in turn are generating plans for more spending on strategic acquisitions, fear has begun to thaw.

TRADING STRATEGIES: February

Will the bull see his shadow?
Trading February's loopy markets.

� Hulbert: The groundhog won't see any bears
� Extra: Should gold bugs buy miners or bullion?
� Kudla: Auto stocks are ready to roll
� Kacher & Morales: Precious metals looking up
� Kahn: We are living in a material world
� Lowell: Fear and leap year
� Hodges: Find opportunity in Europe deja vu
� Hogan: Bulls are tethered by Greece

Click to Play
Investors Are Searching for Growth
Omar Aguilar, chief investment officer at Charles Schwab, tells MarketWatch's Jonathan Burton investors are transitioning to a search for growth from a flight to quality. /conga/story/2012/02/trading-strategies.html190512

And while I think such a thaw looks more like a false spring than the real thing, meaning the probability of fear returning rather than retreating will likely rise in February, I do think we get to a better end by year-end. More on that below.

Here and now, on a fretful cue, toward January�s end we saw the International Monetary Fund cut its forecast for global economic growth in 2012 and even 2013, citing a �perilous new phase� for the euro zone.

Notwithstanding the likelihood that no bailout sun, let alone bailout plan, could solve the euro zone issues outright, and certainly not overnight, the global markets have shrugged off having to pay that monochromatic piper, preferring a pied version of better probable outcomes. I don�t think that�s off base, so much as I think it is premature.

Lowell�s leap year law of averages

Into that mix, you�ll have to balance the lures of better fundamentals with the risk of fear�s return.

The latter can happen suddenly and voluminously, while the former continues to piece together a better outcome than a return to the worst of times. And on a semi-final note (I still have to get to my trades), if nothing else goes right, we have Lowell�s leap year law of averages (with kudos to one of my research analysts, Greg Kelly for helping me prove it), on our side. Take a look at how the Dow Jones Industrial Average and the S&P 500 have fared in every Leap Year since Hoover was in charge:

OK, so plotting this February�s trading course based on what has worked best in Leap Years past is worse than banking on a crystal ball or letting your GPS do your driving for you. But it is more than a bit eye-catching to note that there has never been a negative leap year that hasn�t been followed by a positive one, and our research shows that this year, we�re due one. Moreover, while the average Leap Year gain for the Dow is 5.7% and 9% for the S&P 500, the average Leap Year gain inside the first term of a new President is nearly double that: 10.6% for the Dow and 14.2% for the S&P 500.

Shifting Into stocks

For the fundamental reasons noted above, but with a nod to my Leap Year note, I continue to like State Street�s SPDR Dow Diamonds DIA � for the battle ship balance sheets, multinational reach and dividend enhancement. While there is a gathering view that mega-caps are becoming overvalued, I don�t share it. On days when the going is good, this stake should help us gain speed. On days when there are bumps in the road, there will be more safety in the DIA�s bigger bumpers than in the mid- and small-cap compacts.

I would complement that trade with a bullish signpost my charts don�t get because it hasn�t been there to be seen over the past two years is GM�s re-opening up its 3rd shift for the first time since the 2008 meltdown. Another off-the-beaten-path factoid: ball bearings needed to manufacture the machinery that such plants operate are now running on a 50 to 60 week lag to demand. With Americans driving older cars longer than anytime in recent memory, I think the car sales boomlet is likely to rev up rather than reverse. My preferred pick: Fidelity Select Automotive FSAVX �, manager Michael Weaver�s biggest stake is in Ford (12%), with 8% to 9% in GM, Honda and Toyota. Autoliv (think air bag producer), TRW � (think chassis to technology), Dana (axles, driveshafts, transmissions) and Magna (from interior and seating to powertrain) are in this fund�s production line, too. (More bullish traders could consider owning the fast lane pairing of the iShares Dow Jones Transport IYT � and the Guggenheim Shipping SEA � ETFs, but you�d run the risk of getting skunked and sunk if fear trumps fundamentals this month.)

My yen for the dollar

Long time readers know I like to use currency trades to participate in the ongoing dialectical macro trend of growing and weakening economies. I also like to use such trades to offset the risks on the stock side of the fence � not by dampening volatility but by offering a non-correlated maneuverability; not so much a spare tire as an alternative mode of transport.

The current lull in the euro zone storm has delivered an opportunity for a contrarian trade; along the currency lines, I like the pairing of the Powershares Dollar Bull UUP � with Proshares Ultra Short Euro EUO �, and the Proshares UltraShort Yen YCS �. (The trade positioning I like best: 70% UUP, 15% EUO, 15% YCS.) The trade should help capitalize on a strengthening U.S. economy over and against a still weakening euro zone and what I think is a more vulnerable Japanese economy if the yen remains unchecked and strong. Japan�s economy recorded its first annual trade deficit since 1980 (not just for Tsunami-related issues), and if the yen remains strong, Japan knows it could run trade deficits for years to come, hence it�s in their best interest to weaken their yen. Hence my yen for the dollar trade.

Overall, whether it�s fear�s recurrence in a euro zone staging of Groundhog Day or the thin ice of the global recovery upon which we can still skate toward gains, I favor a balanced approach to February�s leap as we bound to a more bullish year.