Stick With What Works

It’s starting to sound like a broken record:Oil breaks into new highs — as of this morning, crude broke $142.00 before falling slightly. The Dow’s down to new lows — dropping another -73 points in intraday trading, (after a -358 point drop yesterday). All this happens as inflation weighs on everything.
No doubt about it, the bears are back in force. Whenever somber faces parade across CNBC, you know things aren’t going well. As of 1:30 pm Central Time, the Large Caps are struggling again, down slightly. The Nasdaq Composite has given up another -0.2%. Tech can’t seem to find its footing as Oracle (ORCL) and Research in Motion (RIMM) have both shown a negative outlook. The only good news for the broad market seems to be in beer. Even after formerly rejecting InBev’s offer, Anheuser-Busch (BUD) is up almost 2%! It’s like the Street is drowning its sorrow in the suds.

So what should investors do in such times? It depends on your strategy. For the Buy-and-Hold crowd, you just grin and bear it. Bad times don’t last forever and portfolios usually recover. Go buy some BUD and have a good weekend. But, if you’re not happy with the modest returns of the indexes, you’re probably looking for a little more reassurance. Here’s the lesson:

Stick with What Works.

If you’ve been receiving our weekly Newsletter, Invest With An Edge, you’ve been informed. The hottest sectors in the U.S. economy have been Materials and Energy. At the beginning of 2008, if you had split your portfolio between a broad-based Energy (XLE) and Materials (XLB) ETF, you would be up +5.15%. Compare that with the S&P 500 ETF (SPY): down -9.32%. That’s a huge difference!

Will the intermediate trend continue? Nobody knows for sure. But, if you’re going to play this market on the long side, remember: the trend is your friend. It’s much harder to fish for bottoms than it is to ride an uptrending market. Energy is especially strong right now. At the same time financials, consumer discretionary, health care, technology, and industrials are really struggling. If you stick with what works, you should be able to ride out the uncertainty. Pick your best funds and stocks and use the momentum to your advantage. Otherwise, cash may not be a bad option for part of your portfolio.