Two weeks ago, this column highlighted a reason to expect some better upside action in the stock market. Since then, a full
intermediate-term rally has launched, making it time to add a little more exposure to the situation.
It will help if you stop paying attention to the news and keep in mind that the stock market is only a tool for you to use
to make money.
At this stage of what is clearly a decent rally, the best thing to do is focus on the stocks that were performing the best
going into the most recent low and stay with them. In this case, it is semiconductor stocks and other large-cap technology
issues.
Stay with that until the financial stocks, which have rallied sharply in the last few weeks, begin to fall again. For the
last 19 months, the financials have served as tremendously accurate leading indicators of the overall market. It is doubtful
the sellers are finished with financials, so when they come back, the rest of the market could easily begin to have problems
again.
This environment is also a legitimate hunting ground for breakouts in high-growth stocks, the kind Investors Business Daily
is constantly listing. I have had some success in a few of these types of stocks lately, and that tells me investors are in
a mood, for now at least, to take on a little more risk.
These stocks are not for the feint of heart, and you should get involved only if you have the ability to watch the stocks
and the market closely. If that is not what you are into, then stick with the exchange traded funds, or ETFs, that you can
buy and hold for a few weeks or months and get out of easily. These funds limit your upside, obviously, but you won’t take
on any individual stock risk, and your portfolio will be a little easier to keep track of.
Energy stocks also look like they could offer some staying power in this rally. Oil seems to have benefited from the falling
dollar, and more and more investors are waking up to the reality that at some point in the next few years, inflation is going
to go nuts.
It is premature to begin thinking of expectations for this rally. Over the last 100-plus years, the average bull market has
lasted about four years and the Dow Jones industrial average has doubled in price during that time span. I am not so sure
that what we have seen over the last few weeks is the beginning of a new bull market, which is why I am not ready to go full
bore into this thing.
From 1929 until May 1932, the Dow lost 88 percent of its value. There were, however, seven rallies with the market giving
a 20-percent or higher return. One rally lasted several months and returned 43 percent. It is, therefore, highly prudent to
make sure any rally is the sure thing before getting too excited about it.
In addition, it is common for the market to retest areas of previous lows before getting down to the business of grinding
higher for several years. Buying the best-performing sectors in stages will grant you excellent exposure to any new bull market
while still giving you the ability to cut losses short if this turns out to be another common bear market rally.
There are certainly reasons to doubt the existence of a new bull market, but I like a tradable rally as much as the next guy,
and I think we have a tradable rally in front of us. Just don’t get complacent or stray too far from the sell button.
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Hauke is the CEO of Samex Capital Advisors, a locally based money manager. Views expressed
here are the writer’s. Hauke can
be reached at 203-3365 or at keenan@samexcapital.com.
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