Where the money will be made

samsonFollowing on from last Friday’s article, let’s talk more about where you should be positioned this year.

There’s still profit to be made from this market, the bull is still in control until proven otherwise, and The Fed is hell bent on keeping the party going. But I still feel this will be a year when you need to remain flexible, watch for any changes in the air, and most of all, make sure you’re in the stocks that still have plenty of gas in the tank…

Rightly or wrongly, stock prices are driven by sentiment, by how people ‘feel’ about a certain stock. Don’t underestimate the power of collective herd behavior- you fight it at great risk to your finances. Eventually, because nothing lasts forever, sentiment changes, and at that time the collective psyche will dump the same stocks they were recently in love with as they move on to something new.

Of course, time this right by getting in at the start of the new flavor of the month and you’ll make a lot of money. But get in too early (buying unloved stocks that perhaps have further to fall) or too late (buying popular stocks when all the buying has been done), and you’ll lose.

Nobody know for sure what will happen in the future, but something everybody agrees on is that is late in what has been a long bull market. If these were normal times (you know, when governments weren’t buying their own debt with printed money), I could say the bull market had to end soon. But these are not normal times.

So, we party on, but selectively. We need to look at the areas of the stock market that are still spawning rising stars, stocks that still have a lot of gas in the tank, AND are less susceptible to the economy.

Last week I explained that it’s been well-proven that stocks in the industry group that performed the best in the recent six months were the best performers in the months ahead. Their relative strength (their strength in relation to the broad market) propelled them further. This sounds counterintuitive to contrarians, but it works.

What I didn’t mention was which was the best performing industry group of the last six months, and the answer is healthcare stocks. Here’s the fund representing the healthcare stocks, XLV:
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This chart is a thing of beauty. See how it forms that ascending staircase? See how there’s a sense of proportion to the rise? Predictable, isn’t it? Based on what you’d seen beforehand, would you have bought XLV last December when it was around $53.50?

And, as you can see, it just broke upwards again, probably to form another ‘stair’ on its steady ascent.

But this is just a representative basket of healthcare stocks of all kinds. The stars within this star sector are the pharmaceutical companies, and they’re breaking upwards all over the place. Look at this crazy chart of Intercept Pharma that just went from $75 to $445 overnight…!

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Now that’s the kind of start to the day that puts a smile on your face. Pick the right stocks here and what happens to the broader market in 2014 will have limited effect.

Best,

Jim.

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