INVESTING: Strong stocks in strong industries have greatest promise

Let’s get ready to make some money.

I know the cocktail party talk is still centered around the crazy real estate world, but nothing beats the stock market if you know where to go.

A lot of investors bought into the media hype about selling in May and going away. This easy-to-remember phrase has resonance because, over the last 50 years, stock market performance has been better from November through April than May through October.

As an investing strategy, however, it leaves a lot to be desired. You really have to take it year by year and determine if the market offers low-risk opportunities. The S&P 500 is up 5.8 percent just since the beginning of May. That is pretty good performance in four months.

September is one of those months that justifiably worries investors. Again, you have to be careful not to be affected by the hype.

The general market has been correcting since the beginning of August. I expect this correction to continue another two to four weeks. But I don’t think there is a lot of downside possibility to this sell-off. The S&P 500 could fall another 3 percent or 4 percent, and that might be about it. New rally highs in all the major indexes should occur before the end of the year. I believe the S&P can finish the year up anywhere from 4 percent to 6 percent, so buying any subsequent dips that happen in the near term makes sense.

I expect big things in the fourth quarter for some aspects of the market. But don’t look for Eli Lilly and Co., which has been suffering all year, to suddenly break loose and hit $70 a share. As this is the later stage of this bull market, money will be made by concentrating purchases in areas that have been performing well lately.

That still includes the midcap index, although it may be time for this cash machine to be relegated to a market performer. That’s fine. It simply means diversifying a little away from that index is probably smart right now.

One area I continue to buy into right now is the semiconductor industry. An easy way to get exposure to the semis is to buy the Exchange Traded Fund SMH, a basket of 20 semiconductor stocks such as Intel and Texas Instruments that I own for my fund.

It is trading at $36.50 now, and I would like to see it fall to $35 before I buy some more. There is great support at $35, and that could be the launching pad that sends SMH all the way to $40 by December. Individual semiconductor stocks could do far better, but I prefer the lower-risk approach offered by the exchange-traded funds.

Here is a message I will repeat for the remainder of this bull market: The final stage of a bull run offers tremendous opportunity, but only for a select group of stocks. These stocks generally can be located using relative strength studies. By focusing on the strongest stocks in the strongest industries, investors can capture the great profits that lie ahead.

Sitting around in a group of random stocks, however, can lead to something far worse than underperformance. It can lead to losses. Big ones.



Hauke is a local money manager. His column appears weekly.Views expressed here are the writer’s. Hauke can be reached at 566-2162 or at keenan@longboatglobal.com.

Please enable JavaScript to view this content.

Story Continues Below

Editor's note: You can comment on IBJ stories by signing in to your IBJ account. If you have not registered, please sign up for a free account now. Please note our updated comment policy that will govern how comments are moderated.

{{ articles_remaining }}
Free {{ article_text }} Remaining
{{ articles_remaining }}
Free {{ article_text }} Remaining Article limit resets on
{{ count_down }}