The stock market’s Q4 advance has further to go.
But it’s clear from the action of the past week that the initial upside blast is losing momentum. (Monday and Tuesday, the S&P 500 index lost 2.34 points, or 0.1%.)
This is a normal development in a maturing market rally, and it has important implications for your investment strategy. From late August to late September, the only thing you should have been thinking about (and the only thing we were thinking about) was: What looks good to buy?
Now that prices have lifted off, and the market’s angle of ascent has flattened out somewhat, your strategic thinking should begin to shift as well.
Equities have become a two-way street again.
Yes, you should still be searching for attractively priced stocks to buy.
However, you should also be sifting through your portfolio for sell candidates. In nearly all cases, you can get a better price today for the stocks (or funds) you’re inclined to sell than you would have gotten on, say, August 25 or September 28.
We can expect resistance when the S&P bounces back to 2040 because that’s the point where many investors who were surprised by the August collapse will break even. For investors trapped in a losing position, the chance to break even provides a powerful psychological motive to sell.
Thus, any further market gains will likely have to wait until sellers in the 2040 area have had their say.
On the buy side, I’m still keen on the healthcare sector. Although the group has begun to move up in the past week or so, most healthcare names continue to trade well within their base formations on the price charts, leaving plenty of room for recovery.
Best buy at the moment: Vanguard Healthcare ETF (VHT), an index fund that gives you low-cost exposure to the entire sector.
Thanks to VHT’s Big Board listing, you can buy — or sell — the fund anytime, through any stockbroker, regardless of whether your brokerage firm carries Vanguard’s open-end mutual funds.
Over the next 12 months, I think VHT will easily outperform the broader S&P 500 index, perhaps by as much as 300-500 basis points. What’s more, with healthcare stocks off substantially from their 52-week highs, VHT should offer better protection than an S&P 500 index fund if the broad equity market were to run into difficulty during 2016.