In reviewing the charts of the major averages, the pace of the market's recent uptrend appears to have slowed quite a bit lately. The same holds true for a number of coincident sector indexes that illustrate the relative strength and absolute performance of a number of related areas of the market.
Obviously, while we did see some selling at the end of the week, a few hours of profit taking in no way indicates that we are on the verge of a pullback from the current levels. The past five days, however, included an increase in declining issues and down trading volume, on both the New York Stock Exchange and the Nasdaq, while up volume and new highs were lower than the week before.
In total, we may not see exceptionally spectacular gains until we are in the heart of the reporting season, when the actual figures should promote strong surges in those sectors where the numbers are the most favorable. Because of this, and due to the length of time that many sectors have been in buy territory, I advise only nominal additions to your holdings in the top rated funds at this time. Caution is also in order in the case of those sectors that are currently being elevated to Buy territory, since a new investment in any of these funds may turn out to have an extremely limited holding period.
In the development and usage of a sector fund investing system, it is vital that all the measurements employed, and the resulting decision making process, relate as closely as possible to the dominant characteristics of the current market environment.
While Warren Buffett may be the consummate long term investor, today's market participant is constantly being enticed to employ a rapid-fire trading strategy with his or her investments. Trading on the Internet is now available at an extremely low cost, and investors now have the ability to buy and sell stocks at virtually any hour of the day or night.
These days, a long term investor may very well be defined as someone who still owns a stock he or she has purchased by the time that the confirmation slip arrives in the mail. Constant trading has become a way of life for many individuals, thus extreme price swings and a high amount of volatility naturally come along with the territory.
Where investing in sector funds is concerned, these conditions often make it difficult for a technical analyst to differentiate between an upward price move caused by short term traders, and one that is indicative of the participation by the dedicated long term investor. As a result, we can be drawn into investing on the basis of a technical breakout caused by a dramatic surge in short term relative strength.
Unfortunately, moves like these often prove to be unsustainable, and can cause particularly painful whipsaws when the trend is not extended by the subsequent involvement of the longer term investor. In order for us to accurately differentiate between these two scenarios, it may be necessary for us to overlook many of these short term spikes, and delay our investments until a longer term trend has been established to our satisfaction.
This does not correspond exactly to a "buy high - sell higher " philosophy, but in a market where tempting price swings and technical signals are often produced by the fickle short term trader, the resulting unpredictability of many upward moves seems to demand greater patience on our part before an investment is made. The system we employ, therefore, must continually be refined and improved to match the conditions that are present in the market at any given time.
At this time, the Retailing, Air Transportation, Medical Delivery, Telecommunications, Brokerage, Construction & Housing, and Defense & Aerospace funds have been the most reliable performers within the family. The interest sensitive funds have been providing us with steady returns, although there are distinct signs of toppiness in just about all of these sectors. The consumer oriented funds continue to land in the middle of the pack, while we have seen a tremendous improvement lately in the performance of all the health care related sectors.
As we have also seen, virtually all of this month's earnings warnings have been emanating from the high tech area of the market. The recent returns within this group have varied tremendously as a result, which obviously does not help to promote a high level of confidence in these sectors. Gold, energy, natural resources, and raw materials remain the weak links within the family, along with a few of the more erratic technology related sectors.
Keep the faith.
Bernie Kaplan
The Sector Fund Strategist
www.sectorfunds.com |
