Picking the 3 Hottest Sectors for March
Stocks are getting gut-punched this week — the S&P 500 took its biggest loss of 2013 on Monday, and investors are starting to feel anxious about stocks again for the first time since January. The impending sequester is getting more media buzz than the red carpet at the Oscars, and Italy’s election foibles are due their share of the blame too.
I realize that sounds like a crazy thing to say. After all, what investor would want stocks to fall? But take a quick glimpse at where the venerable S&P sits right now and it becomes pretty clear that we’re not exactly on the precipice. In fact, the uptrend in stocks is still very much intact:
In fact, not only is the uptrend still going strong, but stocks didn’t even retrace all the way back to trendline support on this latest correction. So the question is this — with the benefit of hindsight, if you could have bought the broad market back in mid-November and early January (where our previous two arrows lie on the chart), would you have?
If the answer is no, I recommend adjusting your medication…
But that doesn’t mean now’s the time to jump back in and start buying stocks blindly with both hands. Instead, it makes the most sense to focus on the sectors that are the strongest right now — the best way to make that determination is by using relative strength:
As I write, the three best sectors from a relative strength standpoint are financials, health care and industrials. All three have been significantly outperforming the broad market lately — and more importantly, all three are maintaining their momentum.
Statistically, stocks with high relative strength tend to continue to outperform the market on a three-10-month basis, so clearly there’s a big benefit to focusing on stocks in these specific sectors right now.
For more selective investors, the clear winner is the financial sector. Even though I doubt most retail investors favor financial stocks right now — 2008 is still too recent — financial stocks are showing off some stellar relative strength numbers right now. More importantly, as the equity rally continues to propel stock prices, financials benefit the most. After all, rising stock prices mean more money management fees and typically get followed up with a boost to interest rates. Both of those factors could be a big tail wind for financials in 2013.
How you invest in financials (or health care or industrials, for that matter) is less important, in my view. There are certainly plenty of ETFs that provide blanket exposure to the sector. The Financial Select Sector SPDR ETF (NYSE:XLF) is a perfect example. But picking up shares of fundamentally strong banks and investment firms looks just as promising.
M&T Bank (NYSE:MTB) and State Street Corp. (NYSE:STT) are two big banking firms that provide stellar exposure to interest rate and equity price increases without the pitfalls that are still lurking on big banks’ balance sheets.
Jonas Elmerraji, CMT
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