Investor focus has been squarely directed towards what will happen next. This is understandable. However, it is a one-dimensional view of a much more complicated picture. In fact, it is an amateurish approach to predicting (and hopefully profiting from) future events in this abstract entity that we call the stock market.
There are a lot of different data sets I could use to illustrate my points, but I settled on this one from Morningstar.com showing percentages of total returns.
For those of you feeling pretty good about how your shares performed in the last week or so, consider this. There are a dozen US economy sectors in the Morningstar data, and over the last five trading days, they are all up. Maybe you jumped in on some beaten down media companies, and benefited from the nearly 2.5% rise they enjoyed, however you would have done much better by getting involved in any of the following sectors: business services, consumer goods, consumer services, energy, financials, hardware, industrials, software, telecoms, or utilities.
So, was this profitable media trade a stroke of brilliance? Or was the investor just a fish hanging onto the side of a whale, slowly slipping towards the mammal's armpit? Over the last five days, traders may have been able to pick losing stocks, but based on Morningstar's data set it would have been impossible to get involved with a losing sector.
The same holds true when we look at 1 month performance, and even 3 months (with the only exception being Morningstar's Healthcare sector dropping 5.81 percent).
However, this wouldn't be the case if we were looking at year to date performance. It's quite the opposite situation actually, with only energy and industrial materials having any meaningful gains. Most of the rest have performed horribly, with the software sector leading the way down 8.26%.
For an investor jumping in on January 1st, of the twelve sectors, nine would have been landmines. Think of all those New Year's resolutions going so wrong.
This is tough market right now, and very difficult to predict. However, the data shows that the performance (or lack thereof) of the sectors actually has little to do with the sectors themselves. Is the total value of the companies in the media sector worth 5% less since January 1st, but worth 6.08% more over the last 3 months? That's the way the stocks have traded, but the bipolar investor sentiment is revealing that nobody knows how to value anything right now.
Looking closely at any short term data reveals a lot of illusory patterns, and leads to ways to support or refute any position. Things clear up a lot when we look longer term.
Over the last 5 years, the worst Morningstar performer was the media sector, and even it was up 9.72%. All sectors showed gains for the five year period, ranging as high as 38.35%. As is almost always the lesson in the stock market, the buy and hold investors win out.
With this unprecedented, bipolar market environment, many traders may be heading for the poor house. Those looking to get out of underperforming sectors, and into hot sectors, may be doing themselves a great disservice.
Which sectors are hot or cold depends on the timeframe and the investor sentiment for that point in time, and has not enough to do with the underlying fundamentals of the sector itself. Stampeding traders jumping from sector to sector are creating waves where there shouldn't be waves, and most of them are just realizing that they don't know how to surf.