Investing In Late Cycle Stocks

by: Jack Miller

On Monday, the mortgage mess continued to weigh on financial stocks and the index was down 1.14%. There will be continued bad news out of this sector, but most of these stocks have already hit bottom. On the other hand, the energy sector was down .91%. This sector is in for a prolonged period of under performance. It will be years before the sector makes its final bottom and when the big up move starts, this sector will see gains. Relative to other sectors, it will do poorly.

In contrast, the tech sector was down only .02 on Monday. When the novice looks at this market, he or she will see the red ink and think this is bad news, but this is a sector that will do well over the next year or two or three and being down .02 when the average stock is down more is a relative win.

The transportation index was up .62%. Of course, this is a reaction to lower fuel prices and, of course fuel prices will continue to be volatile. Still, this is one of the sectors that will do well in the coming years.

One of the toughest things for many novice investors to learn is to buy relative strength after a turn. There is a temptation to buy the stocks that have dropped the most on the thinking that they will bounce back the most. Home builders would be a good buy based on this strategy. They might do well, but investors should note that they went up and up and up and up over the past six years before they fell 50%. The 50% drop is nothing compared to the climb they made. Because mortgage rates will stay high relative to the past six years for the next several years, one should not expect the home builders to soar and soar and soar again anytime soon.

Investors should try to buy what will do well over the next several years, not what has gone down a lot after doing well for a number of years. This leaves out energy and home builders as candidates for investment.


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