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Analyst Watch: Forget Being Defensive, It's Time For Some Risk

U.S. stock index futurespointed to a lower open Monday, in the wake of a negative week for the major indexesas investors braced for the next batch of earnings and data on the state of the housing market.

Here's what analysts and others are watching before the bell:

Jerry Castellini, president and CIO for CastleArk Management, says the markets have been focused on the prospect of one of the "big three" macro events coming to fruition:

1. Currency Debasement—Inflationary Spiral 2. An aborted economic recovery—Double Dip 3. The Bullard Case—Deflation

As a result, sector pricing is all over the map, he says.

"These anomalies are a direct function of the different outcomes that the big three would cause," he says. "It’s our view that most of these macro risks have been priced into financial assets. We believe the probability that any of them will occur is quite low."

For example, the double dip scenario is well priced into these markets. With long-term yields at 2.9 percent, the risk of a negative GDP quarter is already highly discounted. On the stock side, the lofty valuations for and execution risks of ‘defensive’ names like P&G and Colgate make the flight to safety trade a lot riskier than it may appear.

Instead, Castellini says his firm believes:

1. The economy avoids a double dip. The low cost of capital and strong flow of both corporate and individual income will trump deleveraging and the fiscal headwinds that investor’s fear.

2. Inflation will stay low, growth will be anemic, but the Bullard-case will be avoided.

3. Industries with high capacity utilization will see continuing profit gains. The stocks in these industries are priced for a recession that will not occur.

4. The imbalance of portfolio risk-taking by investors will correct. Equity markets will do fine.

As investors regain their risk taking appetites, he says the following sectors will do well:

Energy/Materials—too much demand chasing too few sources of new supply. Before the cycle ends, new highs in prices will be the only way to dampen demand.

Technology—too much corporate cash flow and too many needs to increase profitability. Upgrade cycles, cloud computing, smart devices will drive this sector

World Manufacturers like Caterpillar , Deere , Emerson . Companies with great brands, international distribution and world class organizations will compete very well against the low-cost alternatives.

John Helmers, founder of Swiftwater Capital, says he definitely thinks it is the time to buy.

"Many pundits are saying that the fed statement Tuesday was a downgrade of the economy," Helmers says. "That implies that its comments were predictive. Instead they were just describing the known deceleration of the last few months (i.e. looking in the rear view mirror).

"More importantly, the fed committed to maintaining its large balance-sheet — and to move the Fed’s buying of treasuries out the curve which should keep long term rates low. The fed is essentially saying they are going to keep the risk-free rate extremely low until money flows into riskier assets (i.e stocks go up and the money multiplier increases). The moral of this story imho is 'don't fight the Fed!'"

Five stocks he recommends now are:

GE

Johnson & Johnson

JPMorgan

WalMart

IBM

See more of what analysts and money managers have to say, and get the latest financial news. Watch Squawk on the Street every weekday morning starting at 9 a.m. ET.

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