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James Brumley

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Wake Up and Smell the Leaders - Style, Sector Biases Remain Unchanged

You can slice it however you want to - it’s not going to change the fact that small caps have been, and continue to be, the market’s best thing going. That’s not to say they’re bulletproof from another pullback, because they’re not. They have been the first and best to recover from the May implosion though, after leading the charge since early February.

Growth has a slight edge over value, but not enough of one to favor one over the other. Rather, our bias right now is an overweight of the entire small cap segment. [Interestingly, the micro caps have been just mediocre over the last several weeks, and no longer offer a tangible edge.]

Style Performance Since 2/27/10

Market Style Performance Since 02/27

Market Style Performance Since 02/27

At the bottom of the barrel, once again you’ll find large caps. Value as well as growth stocks within this segment continue to battle for last place; our negative bias is equitable though…. we suggest underweighting them both.

On the sector front, gold has taken charge again. With every advance it makes (and related stocks make) though, it gets that much deeper into speculation-land, and well past prices that are justified amd sustainable. As such, our bias - perhaps outright advice - is simply to steer clear of it…. the speculators and amateurs have taken over, and it’s anybody’s guess where they’ll steer the ship.

The runner-up and the third-place sector leaders since late February, however, are both areas that (1) actually offer some legitimate upside potential in the foreseeable future, and (2) are both areas we currently recommend overweighting.

Transportation stocks - despite the fact that they’re leading the market over the last three months with net progress of 5% during that time - have remained off the radar for most investors. Someone else’s failure to notice an opportunity is to your advantage though.

Technology stocks are right behind them for the last three months, up 3.2% for the period. While tech’s problem is the diametrical opposite of transportation’s (everyone’s following tech), the space is still uncrowded, and there are tons of great tech names out there that haven’t been bid up to ridiculous prices.

Sector Performance Since 2/27/10

Sector Performance Since 2/27/10

Sector Performance Since 2/27/10

At the bottom of the barrel you’ll find basic materials next to last, and energy dead last…. though the basic materials group was reignited last week. Energy is down 5% for the last three months, while materials are down 1.5%.

Despite the lagging performances, both are also areas we recommend overweighting at this juncture. Given the sector-based headwinds though, being a tad more selective than usual is obviously important.

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James Brumley is a freelance writer and registered investment advisor. He began his career as a broker with a major Wall Street firm, where fundamentals and long-term holding periods were core strategies. After that, he switched gears completely, becoming an analyst at a short-term trading newsletter that focused on technical analysis. He now manages client money using the best of both philosophies. His company, Bluegrass Portfolio Management, offers investors an opportunity to reap superior returns with minimized risk.