Daily Gains Letter

These Are the Sectors to Watch in an Overvalued Market

By for Daily Gains Letter |

Why Looking at the Dow Jones as a Whole Could Be a Big MistakeWhat a difference 81 years can make. On July 8, 1932, the Dow Jones Industrial Average hit a Great Depression-era low, closing at 41.22, representing an 89.19% loss from its March 1929 peak of 381.17. Over the next 18 months, the Dow Jones Industrial Average gained 150%.

Over the last 81 years, the Dow Jones Industrial Average has climbed 3,700%, and closed at a record-high 15, 461 yesterday. Since hitting a Great Recession low of 6,705.63 in March 2009, the Dow Jones Industrial Average has rebounded almost 130%.

What have we learned over the last 80 years of investing? Maybe that patience is an investor’s most important virtue. When the markets have been faced with wars, terrorism, and economic or political upheaval, they always rebound. Even when the markets are down, there’s always a bullish play waiting to be discovered.

After all, making money in the stock market is about taking advantage of opportunities. People run to and away from stocks for the wrong reasons. In the words of Warren Buffet, “A public-opinion poll is no substitute for thought.” (Source: BrainyQuote, last accessed July 11, 2013.) When it comes to investing, it’s more important to think for yourself than to follow the herd.

That is especially true today. With the Dow Jones Industrial Average hitting a new record, that exuberance has more to do with the Federal Reserve’s $85.0 billion-per-month quantitative easing policy and artificially low interest rates.

In essence, today’s growth on Wall Street can be attributed to Federal Reserve chairman Ben Bernanke, the world’s biggest sugar daddy.

This will become evident after the second-quarter earnings season is in full swing. We know this because so far, 81% of S&P 500 companies have revised their second-quarter outlook to below their original estimates. As a result, it’s going to be hard for investors to celebrate after a company says it beat lowered guidance by a penny or two. It will become even more evident once companies start reporting their third-quarter guidance.

That’s because August is one of the weakest performing months for the Dow Jones Industrial Average, S&P 500, and NASDAQ. And September is the weakest performing month for these key stock indices—or at least it has been for the last 62 years. (Source: Vialoux, D., “It’s time to sell market-sensitive ETFs,” The Globe and Mail, July 8, 2013.) Fortunately, the U.S. hurricane season ends on November 30; anything can happen between September and November.

Unfortunately, U.S. companies on the Dow Jones Industrial Average won’t be able to rely on foreign sales from Canada, Europe, and China to boost their performance. The International Monetary Fund (IMF) said the global economy is growing more slowly than expected, and cut its 2013 global growth forecast to 3.1%.

While these may be generalizations, some stocks on the Dow Jones Industrial Average may fare a little better than others during the second half of 2013. For example, falling commodity prices could hurt Caterpillar Inc. (NYSE/CAT).

At the same time, with interest rates on the rise, insurance companies, including The Travelers Companies, Inc. (NYSE/TRV), are expected to perform well. And UnitedHealth Group Incorporated (NYSE/UNH) could continue to benefit from the aging baby boomer population.

Just because the Dow Jones Industrial Average hit a record high doesn’t mean all of the stocks in the index are created equally. Despite the simplicity of the Dow Jones Industrial Average, or maybe because of it, some stocks are better poised than others to perform well during the second half of the year.

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