CautiousInvestor

How to Play a Market Pullback

This is a most informative article, highlighting the challenges of investing when the market gets ahead of itself in a very complex economic environment.

"The sectors that led during the rally, corrected most during the sell-off; this means that financials, consumer discretionary, materials and industrials; should underperform in the next few months, while health-care, consumer staples, utilities and telecom services should emerge as the leaders."

This anticipated sector rotation corresponds with classical patterns of the past in which materials, industrials, consumer discretionary and financials start advancing at the trough of ISM surveys in anticipation of economic recovery.

In today's market, though, we have a situation in which the ISM data has bottomed but the economic recovery is being questioned and reexamined in the light of much doubt. Unlike previous cycles in which the uptick comes immediately after the bottom, we may crawl along the bottom until needed structural changes take place and consumer balance sheets are repaired. This could take several years and there will be other challenges along the way.

The likely course in the immediate future, though, is exactly what the author lays out.