Friday, December 30, 2005

Play it again, Sam.

Sam Stovall, Chief Investment Strategist at Standard & Poor's, appeared on CNBC a few minutes ago and suggested that overweighting the prior year's most successful sector often leads to further outperformance over the S&P 500 the following year. The top performing sector in 2005 was... hmm, let me take a look here... hey, whaddya know - energy. His statistics suggest this outperformance occurs in 7 out of 10 years, or 70% of the time, which is a rather impressive track record.

I have looked at this also as a trading strategy, and I agree with him.

There is one key though: You must avoid a sector that has completely overheated and is about to crash land.

To be perfectly clear, I am not sure if energy is an entirely safe bet for 2006 based on Sam's idea. Energy has done well over the past 3 years, and very significantly outperformed in 2005. On the other hand, many people are still quite skeptical of the energy story and are underweighted (and may need to buy..). Thus, we may have room to run until everybody thinks energy is the place to be. Keep an eye out for that, it's when you'll know to sell everything.

The key, I think, is to watch your energy holdings very closely and not be afraid to take some off if they trade poorly in 2006. You can always buy them back if you were early.

Additionally, Tom McManus of Bank of America, who had recommended energy at the beginning of 2005, feels that energy may still have some life left in it. He is rather bearish on the rest of the market though.

Have a healthy & happy New Year.