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Shifting Gears

You might use a skateboard to go down a hill, but to go up a hill a mountain bike makes more sense.  The NASDAQ has been in an ugly mood over the last 9 months.  Certainly there have been trading opportunities on both the upside and the downside.  For the most part the trend has been negative.  But are the sectors that made money for some investors over the last 9 months the right sectors to use for the next 9 months?  As the owners of high tech stocks got jittery and bailed out, you could see the shift to more defensive stocks.  On many days the NASDAQ was down solidly and the NYSE was strongly higher.  Money went out of sector “A” and into sector “B”, usually only to move back a handful of days later.  During this Ping-Pong game the bulk of the money in play got stuck in the defensive stocks and on the sidelines.  Defensive stocks are those companies that sell products that people will buy regardless of what the economy is doing.  So now looking forward investors are asking the same question they ask every day: “where is the best place to make money today?” 

The facts are simple.  During periods of volatility and funds flowing out of hyper growth stocks money goes into defensive issues.  Defensive companies sell goods and services people will still need no matter what the economy is doing.  Sectors considered defensive are hardly glamorous, but they do show steady lackluster growth and profits.  Bathroom tissue and aspirin are the classic examples in this area.  People will buy them regardless of what the economy is doing.  During the market declines in mid-1998 the NASDAQ declined 29%, while one group of Defensive Stocks only declined 4% during the same period.  What is extremely important for investors to consider at this point in time is the fact that late in 1998 when the markets rebounded from their mid year decline, the NASDAQ rose 35%, and over the same time period the defensive stocks mentioned above managed only a mild 9% gain.  The important observations don’t stop there.  During the period from the end of 1998 to February 2000 the NASDAQ climbed 250%.  But what is critically important to note is that during the same period the measure of defensive stocks DECLINED almost 30%.  It behooves investors to carefully watch the markets and follow the flow of money.  Ideally an investor should notice what’s working before its widely understood as common knowledge, and exit before everyone knows it’s time to run for the too crowded exits.  The NASDAQ stocks need to get the attention of a portion of your portfolio.

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