If you’re seeking a time-tested way to determine when to get in and out of stocks and in which securities to invest during any given bull market, one of the better approaches to employ that requires very little research is to “follow the leaders.”
In using that phrase, I mean to exit the stock market by selling all of your stock holdings once stocks of companies that are dominant participants in their particular industries appear to be rolling over.
Specifically, after those stocks have peaked and then trended lower for a few months, sell them. Then re-enter the stock market by investing 100 percent of your financial market-designated assets into stocks again, after those same stocks appear to have bottomed and have trended higher for a few months.
Make 12.3% Without Touching Stocks, Bonds, or CDs . . .
Examples of market leaders include the following:
• Basic materials: Freeport-McMoRan (FCX) and Dow Chemical (DOW)
• Consumer staples: Proctor & Gamble (PG), Coca-Cola (KO), and H.J. Heinz (HNZ)
• Consumer services: Priceline (PCLN), Netflix (NFLX), and Amazon (AMZN)
• Financials: Bank of America (BAC) and Citigroup (C)
• Industrials: Caterpillar (CAT), John Deere (DE), and General Electric (GE)
• Technology: Apple (AAPL), International Business Machines (IBM), and Texas Instruments (TXN)
As you would find by reviewing charts of those companies’ stocks from June 2007 through the April 19 close, most of those stocks peaked at about the same time that stock prices in general peaked during October 2007.
Then, they bottomed at about the same time that stock prices in general, as measured by the major stock-market indices, bottomed.
Except for the consumer-staples stocks listed above — which tend to underperform the major stock-market indices during upward-trending (bull) markets — all of the stocks outlined above outperformed the S&P 500 Index from the time that it bottomed on March 9, 2009, through the April 19 close.
In fact, most of those stocks substantially outperformed the S&P 500 during that period. For example, Priceline (PCLN) appreciated 571 percent from Oct. 9, 2009, to April 19, 2011, while Dow Chemical (DOW) returned 533 percent and Caterpillar (CAT) returned 372 percent during that period.
In comparison, the S&P 500 Index returned 103 percent (including dividends) during that same period.
Not only does “following the leaders” serve as a reliable indicator as to when to exit and to re-enter the stock market, but investing in the dominant participants in any given sector of the market usually results in the generation of larger investment returns than does investing in a broadly diversified portfolio of securities.
Note: I did not provide any information on stocks of companies that operate in the so-called “defensive” sectors of the market, as they tend to generate smaller investment returns than do broadly diversified portfolios during upward-trending markets.
In addition, I didn’t provide any information on stocks of companies that operate in the energy sector because those stocks tend to peak several months after peaks in the major stock-market indices.
About the Author: David Frazier
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