My colleague Joe Austin recently shared some of the perils of blindly following the “buy and hold” mantra in today’s market…
But you might know someone who would “never sell” a particular stock. I know folks with that kind of mindset.
In decades past, this might have made sense. After all, household names like consumer-goods company Procter & Gamble (PG) and telecom firm AT&T (T) dominated the market.
They provided goods and services. And their recipe for stock gains was simple…
Straightforward companies like those produced more goods and services at better prices. Their margins grew. And they returned more value to shareholders.
It was a simpler time.
Now, some things never change. But there’s no question that today’s market is a little different.
For example, tech companies run unprofitably for years…
Amazon (AMZN) famously was “unprofitable” from 1994 through 2003. The company expected investors to understand that one day, it would just “flip on the money switch.”
So I understand if you yearn for “buy and hold” companies.
But folks, one sector is packed full of “simpler” companies. And today, it’s the worst sector in the Power Gauge.
Let’s take a look…
Now, I’m betting you haven’t guessed which sector we’re talking about. After all, just about no one is thinking about these stocks.
But that’s the problem. In today’s market, they’re just too simple.
I’m talking about the materials sector.
In the Power Gauge, we track it through the Materials Select Sector SPDR Fund (XLB). And as I mentioned earlier, it’s currently the lowest-ranked top-level sector in our system.
That’s because of the sector’s Power Bar ranking. Take a look…
As you can see, the Power Gauge doesn’t rate a single stock in XLB as “bullish.” Nineteen of the fund’s holdings are stuck in “neutral” mode. And eight earn a “bearish” or “very bearish” rating.
Let’s use chemicals and plastics producer Dow (DOW) as an example…
Dow is exactly the kind of household name you would think to “buy and hold.” And its business should be straightforward.
Despite that, the broad market has clobbered Dow in recent years. The chart below shows the big underperformance…
Over the past five years, Dow’s stock is only up about 21%. Meanwhile, the broad market has soared roughly 98%.
If you had bought this obvious blue chip back then and held on this whole time… the market would have left you in the dust. And right now, the Power Gauge gives Dow a “very bearish” rating.
Folks, this is the crux of the problem investors face today.
You don’t need to whip in and out of positions. But simply buying and holding a “good name” isn’t enough.
One look at Google parent Alphabet (GOOGL) in the Power Gauge makes this clear…
Alphabet has soared about 169% over the past five years. It has obviously crushed Dow over that same time frame. And it has also beat the broad market.
But even then, you can see clearly on the chart that the Power Gauge would have helped you avoid the worst of the “tech wreck” in 2022…
Just before that year started, the Power Gauge slipped firmly into “neutral” territory for Alphabet. And you can see, using our proprietary measure of relative strength, that the stock was clearly underperforming the broad market for just about all of 2022.
As I said, you don’t have to whip in and out of positions to take control of your portfolio. Your strategy can be as simple as using a tool – like the Power Gauge.
You just need to know which way the “wind” is blowing. For example, the wind isn’t blowing in the direction of materials right now.
Then, make sure you don’t blindly fall into a “buy and hold” trap.
Good investing,
Vic Lederman
