 |
Which
Sector Will Lead the Next Bull Market? |
|
Every
bull market has a leading sector, and it usually emerges early on.... early
enough to be evident even to the untrained eye. Technology was the
clear leader in the go-go market of the late 90's, while energy stocks
were the big winners during the bullish wave between 2002 and 2007. So
which sector is poised to blaze the trail if 2009 turns out to be the year
we recover? We've got some likely candidates below.
|
 |
A
Picture is Worth 1000 Words |
|
|
First things
first. It's still a little premature to start overweighting what we think
will be the leader of the next bullish era. On the other hand, it's
not wrong at all to start planning it (and figuring out what to look
for).
 And
what exactly are we looking for? We want to see the same subtle
hints we saw from technology in the last 90's, and from energy on the early
2000's. The nearby percentage change charts express the idea
with clarity.
When the bull
market reemerged in 1994, the technology sector (the gray line) took charge
right out of the gate. Very few people thought much of it then, as they
expected the financial stocks to lead again as they had in the early 90's.
The clues were there though - despite their implosion in the early 2000's,
technology stocks made some huge money for investors who knew when to get
off the train in late 1999.
Now fast forward
to 2002. Though energy stocks (the blue line) didn't jump out right at
the recovery's onset, once they took the lead in late 2004 they never
relinquished it. For those investors who were paying attention at the
time, energy stocks had a very rewarding three year run.
 So,
that's what we're looking for now... an emerging 'big picture' leader.
OK, so now that
we understand the strategy and know what to look for, we can start applying
the technique to our current situation. As it just so happens, the emerging
leading sector is also likely to lead for an altogether different
reason.
We've never
been fans of 'conceptual' investing, which is simply the practice of choosing
a stock or group of stocks based on an idea more so than facts.
One
example of conceptual investing is buying anything that ended in 'dot-com'
in the late 90's. In that era, it was assumed any company with a website
would successfully operate an e-commerce business, and eventually turn
a profit. Once the web's euphoria wore off though, it was clear that
just having a website didn't make a company profitable.
So what?
Well,
the latest conceptual investing idea - as much as we dislike its notion
-
may actually be a legitimate expectation.
Here's the premise:
With
interest rates so low, and with so many newly-printed dollars flooding
the U.S. economy (and all economies for that matter), inflation could skyrocket.
And
we don't mean you should look for a temporary bump in inflation. We mean
it could take years to burn off the effects of such large cash injections
at a point in time when the Fed basically can't raise rates.
One of the key
effects of such inflation is rising and/or high basic materials prices...
like metal, lumber, chemicals, you name it - even crude oil to some
extent.
That can stink
for the consumer, but you know who it's good for? Basic materials
companies benefit from higher materials costs, because margins can widen
considerably. By extension, high materials margins are also good for
basic materials stocks and their investors.
Though we've
only been in rally mode for a little over three weeks, it already looks
as if the market is starting to agree with the inflation concept.
 Financial
stocks have actually led the way since March 9th, but only because the
sector was so oversold at that time. The basic materials sector is the
next best performer, but it's been doing well without the assistance
of being severely oversold. Plus, it's actually the leading sector
if you look at slightly longer time frames. The nearby chart tells
the story pretty clearly - materials stocks are getting more traction
right now than other sectors.
Yes, it's only
been three weeks... a little too early in the game to bet the farm. However,
all
large trends start out as small trends.
If you look
back on the prior two bull markets, you'll see how the big winners subtly
took charge early on, but then continued to outpace all other groups. Picking
the winner this time around may be that simple again.
The other
'sector of interest' is technology, which has been quietly trailing
the leader regardless of what your time frame is. While we'd love for something
new and completely unexpected to pop up as a leader during the next bull
trend (just to shake things up a little), a strong technology sector
does make a lot of sense at this juncture.
As we already
said, though we don't want to wait forever to make a firm call like
this, three weeks may be too little time.
We'll continue
to watch this chart, and we'll post an update when merited. Until then,
basic
materials stocks deserve your first look of you're going fishing for longer-term
holdings.
|
Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
