Use with discretion!

 

Quick and dirty rule-of-thumb that I read from somewhere some time back:

“The sectors that outperform are the classic defensives such as Utilities, Health Care, Staples and Telecom. The sectors to avoid would be Industrials, Technology, Consumer Discretionary and Financials. I would suggest that hedge funds that go long the defensives and short the cyclicals will do very well in this environment, along with a handful of high-quality bonds and continued exposure to gold, even though it does look overextended on a near- term basis.”

In short, in anticipation of:

Bad times- Utilities, Health Care, Staples, Telecoms
Good times- Industrials, Technology, Consumer Discretionary, Financials

My personal observation is that during the GFC, everything was being bashed down to such cheap valuations that even your ‘bad times’ stocks would have been at such mouth-watering valuations that they’d be hard to resist. However, with the rally in the markets from the lows, those ‘good times’ stocks would have, in general, out-performed ‘bad times’ stocks by a much greater margin.

This is just a rough guide though. I personally feel that my valuation models provide a much better signal as to when to exit a holding. This guide would come in handy in telling me what sectors I should be putting my money into i.e. If I sold an industrial manufacturing holding only to plough it back into another one that had reasonable valuations, chances are I’m setting myself up for disappointment.

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