Stocks About to Break Out or Break Down? S&P 500 Nears Another High

NEW YORK (TheStreet) -- Stocks are flat Friday with the S&P 500 within a stone's throw of all-time highs. That got the CNBC "Fast Money Halftime" traders wondering whether stocks are set to break out or break down. 

Stocks are more likely than not to break out to new highs, but if they don't it's "not the end of the world," according to Josh Brown, CEO and co-founder of Ritholtz Wealth Management. It helps that other international funds are breaking out, too, including the Vanguard FTSE Europe ETF (VGK) and the iShares MSCI EAFE ETF (EFA). 

Not all sectors are participating in the rally such as small-cap and transport stocks, but that's fine, Brown added. 

It's more about individual stocks rather than the entire market, said Jim Lebenthal, president of Lebenthal Asset Management. He likes retail stocks such as Kohl's (KSS), Target (TGT) and J.C. Penney (JCP) and technology companies including Qualcomm (QCOM), Cisco Systems (CSCO) and IBM (IBM). 

Equities are not in a bubble, Lebenthal added. He expects interest rates to go higher in the long term, making financials attractive as well. 

However, Jon Najarian, co-founder of optionmonster.com and trademonster.com and Michael Block, chief strategist at Rhino Trading Partners, believe interest rates are going lower in the intermediate term. As a result of lower rates, Najarian believes bonds will move higher.

Block said he doesn't expect the Federal Reserve to raise interest rates in September, like many other investors currently expect. He also called the financials a short-selling opportunity, along with select stocks from the industrial sector, auto industry and metals industry.

McDonald's (MCD) shares jumped higher on the idea that activist investors may be able to turn around the struggling fast-food restaurant. However, Lebenthal argued the company may be too big for an activist and it's not yet a good investment because it's so early in the turnaround stage. 

Brown was more pessimistic on McDonald's, saying if it weren't for low interest rates, big dividend yield and share buyback program, McDonald's would be trading in the $60s. The company basically does everything wrong but the stock never pays the price, he added. 

From an activist standpoint, Block made the case that there isn't a whole lot that can be done at the moment to change the underperformance at McDonald's. A REIT structure seems unlikely, he added. Lebenthal agreed. 

Sarat Sethi, managing director and managing partner at Douglas C. Lane & Associates, isn't long McDonald's but he is long Yum! Brands (YUM). The stock is up 3.3% following an upgrade to outperform from neutral and a $108 price target from analysts at J.P. Morgan

At a recent investor conference in China, Sethi says management is much more bullish on China than they have been in the past. Currently there are 6,000 stores in that country but could be as many as 20,000 in the next few years. Yum! Brands has plenty of long-term potential.

However, if Yum! Brands doesn't achieve its goals, it could always consider spinning off its Chinese business. That would unlock value for consumers, Sethi said, adding he doesn't think the company should resort to that move right now. While he is long the stock, he doesn't consider it a buy after the recent rally. Investors will likely get a chance to buy the stock in the $80s, he said.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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