Bulls, bears cede to sectoral markets

Like most other people in this business, I frequently refer to ‘bull’ and ‘bear’ markets. It’s a convenient shorthand for expressing the general direction stocks are moving.

It’s also simplistic and often misleading. Saying a market is in a bull phase conveys the impression that a rising tide is lifting all boats. Conversely, when we talk about a bear we imply that everything is under water.

Those concepts may have been broadly true in the past. But they do not apply to the market conditions we have experienced in recent years.

Sector markets
What we are seeing today can best be described as a sectoral market. Certain groups may be in deep decline – a bear phase – while at the same time others are showing tremendous strength.

Technology stocks have been in a bear market for over a year, and may still be so.

The TSE Industrial Products sub-index, which includes high-tech companies like Nortel, plunged 54.3 per cent in the 12 months to June 1. That was enough to drag the broad index down, but it doesn’t tell the whole story or anything like it.

While tech stocks were crashing:

  • The Metals andinerals sub-index was rising 39.1 per cent.
  • The Oil & Gas index was up 24.9 per cent.
  • The Conglomerates index rose an astonishing 51.9 per cent. Pipelines were ahead 36.5 per cent.
  • Financial Services advanced 25.6 per cent.
  • The Gold & Precious Minerals index has been on the move, up 12.3 per cent year to date.

In short, amidst all the gloomy news you could still have made profits – handsome ones – if you were in the right place.

Focus on quality
That will be the challenge to investors going forward. I don’t see the situation fundamentally changing. The market will continue to be sectoral in nature. The key to success will be to focus on quality stocks in areas that are in the ascendancy and to dump those in sectors that are depressed – or likely to become that way.

This is not a buy-and-hold market. This is a market for traders. You need to keep a close watch on what’s happening, take profits as appropriate, and get rid of losers before they cause serious damage.

If you’re not comfortable with that, put your money into some good mutual funds and let the pros make the calls for you.