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Flat After All That?

Editor's note: As part of our partnership with Nightly Business Report, TheStreet's Jill Malandrino will join NBR Monday (check local listings) to find the best trades in a flat market.

As of June 30, the Greek elections are out of the way, the EU summit has come to pass and Scotus finally decided on Obamacare. No doubt the past year has been a wild ride, making even the most seasoned traders and investors reach for Costco-sized bottle of Tums. So, let's take a look at some numbers and where we actually are. The S&P 500 is essentially where it was 12 months ago (1362 on June 29 versus 1356 the high of the first week of July 2011), whereas crude is down 12.5%, industrial commodities are weaker and the euro is 12% lower against the dollar.
Word on the Street

Does that mean we break out the party hats as a lot of the overhangs plaguing the markets have been resolved? No. There is still a lot of uncertainty and the markets will continue to be driven by European and Chinese headlines and speculation instead of fundamental, technical, economic and sentiment factors. Not to mention that expectations for the upcoming earnings season are less than stellar. Companies are going to have beat, solidly at that, to be rewarded in this "show-me" environment. This translates into stocks trading in a highly correlative fashion making bottoms-up analysis a bit more tricky. Not exactly the most fun environment for those of us that love to go stock-picking.

Markets, by nature of their design, continually evolve, and so must we as market participants. Being able to think like an investor and a trader, as well as being appropriately diversified and nimble, will be key to navigating mostly unchartered territory. Just like more "normalized" markets, quality companies will be rewarded as relative out (or under) performers, especially when things turn around with more steady, consistent domestic and international macroeconomic data. Think of those stocks that boast healthy balance sheets, lots of cash to pay back investors with healthy dividend policies and consistent execution by management. So, let's take a look at three stocks in different sectors, two being long trades and one being a short.

Our first long is International Business Machines (IBM - Get Report) . I have spoken about this stock on National Business Report before and like the name more than ever.

For a market that is flat year over year, Big Blue is up 12.05%, having increased its buyback program to $7 billion and having increased the dividend by 13% to 85 cents a share in the second quarter. Yes, the tech sector had a tough time last week with downbeat predictions from one Wall Street analyst or another, but IBM was actually up 1%. The company is using acquisitions to grow its software and services vertical, which makes up 80% of its business. So not only is IBM proving its worth as a market leader, it is still focused on growth and paying investors. This combination of market dominance and growth potential makes IBM a great core stock for your portfolio, as you will likely see price appreciation (or at least capital preservation) while IBM's healthy dividend program rewards you for holding a quality name. Moving along to my 2012 pick and the fertilizer space, Mosaic (MOS - Get Report) (MOS) is my favorite stock. This group is your most basic supply/demand story and despite weather trends wreaking havoc in the most important farming regions of the globe, industry fundamentals and the charts point to a solid upside move in the back half of 2012. We have started to see the thesis play out just in the last week of June.

Looking at MOS specifically, it's a solid play on the fertilizer turnaround. No commodity, in all likelihood, will be needed more on this planet than fertilizer as the world's supply of arable land is shrinking against an increasing population. MOS has a boat load of cash on hand and a very low debt-to-equity ratio, with nothing coming due in seven years. At a trailing price-to-earnings ratio of 11.6 times you're buying a quality business for a blue chip price.

Lending to our thesis of being diversified in terms of sector allocation and investing style, let's wrap it up with a retail stock that I recommend avoiding or shorting altogether -- J.C. Penney (JCP - Get Report) . Of the 10 worst-performing S&P 500 stocks, three were retailers; JCP was one of those names earning (if you will) that ranking. Although the stock is cheap in relative terms, it does not mean that it has a quality story behind it.

Recognizing that fact is a big key to picking positions. Cheap does not always mean unique opportunity. Sentiment is still very negative and two out of the three areas that were a part of the turnaround strategy -- new management, new pricing strategies and new concept stores -- are already showing signs of stress.

While I expect more choppy, unconstructive trading at least through the summer, that doesn't mean there are no opportunities for some quality directional trades. The key is to utilize all of the analytical tools at your disposal and remain diversified in terms of sector allocation and investment style.

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JCP $9.03 -3.11%
IBM $144.25 0.08%
MOS $27.11 -1.45%
AAPL $94.19 -1.04%
FB $118.06 0.54%


Chart of I:DJI
DOW 17,651.26 -99.65 -0.56%
S&P 500 2,051.12 -12.25 -0.59%
NASDAQ 4,725.6390 -37.5850 -0.79%

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