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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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