Don’t Fight Every Battle… Just the Right Ones

About 2,500 years ago, Chinese military strategist Sun Tzu wrote in The Art of War

He will win who knows when to fight and when not to fight.

The art of investing is similar to war in some ways…

For example, buyers and sellers are always battling to get the better end of a deal. Going into every transaction, their weapons of choice are the “bid” and “ask” prices.

However, in terms of the big picture, investors don’t always know which weapon is best…

We’re constantly battling an unknown future. And of course, our enemy can fight hard.

Today, a highly talkative Federal Reserve is leading the opposition’s charge…

Its weapons include bold statements, interest-rate hikes, inflation trends, and recession forecasts. And an infantry of commentators opines on every little shift…

One day, this infantry believes the market should fall because elevated inflation and the threat of recession remain. Then, the next day, it believes the market will rise because stocks discount the future – which includes projections of lower inflation and falling rates.

In the end, nobody really knows which level of sustainable economic activity matches which level of inflation. It’s all a guessing game. And ultimately, we’ll keep learning as we go.

So today, let’s channel Sun Tzu. We’ll increase our odds of winning if we know when to fight…

Within the Power Gauge, the Financials and Earnings categories are great weapons for us…

These two categories show what the smart investors are doing. Those folks put their money behind their opinions. And they act based on how they see patterns within each company.

Now, we shouldn’t be naïve. We don’t completely close our eyes to interest rates and the Fed’s other weapons. But those things show themselves to us in other ways…

Housing and bank stocks will reflect investors’ interest-rate worries. Energy stocks will tell us a lot about their thoughts on economic activity and inflation. And comparing consumer staples with consumer discretionary will reveal plenty about the state of the economy.

We don’t actually have to explain it all. We’re not writing a comprehensive report.

All we need to do is move into and out of the right stocks at the right times. Through its overall grades on stocks, the Power Gauge signals which moves to make – and when.

Remember, the Power Bar ratio is a valuable weapon to help us figure out when to act. It compares the number of “bullish” or better stocks with those ranked “bearish” or worse within a specific industry or a broader index.

Right now, the Power Bar ratio tells us that energy is in. And so is finance (banks, insurance companies, and capital-markets firms).

Health care is still good as well, especially biotech. We can also consider construction and engineering. And if you’ve never thought about foreign airports, now is a good time to start.

I know many folks want to try to “buy the dip” on tech stocks. But we should be patient. The Power Gauge is finding better weapons elsewhere today.

Don’t try to fight the Fed’s intellectual battle. You’ll just drive yourself crazy. Instead, you just need to know when to fight. And you should always aim to pick battles you can win.

Good investing,

Marc Gerstein

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