Target the 'Moving Sectors'

01/05/2012 11:00 am EST

Focus: STOCKS

Jim Farrish

Founder and CIO, Jim's Notes

Because stock investing is mostly about managing risk, it makes sense to look for the sectors that are leading first and foremost, says Jim Farrish of SectorExchange.com.

You do a lot of work in the area of investor psychology. Tell us how that works with risk on, risk off, and what you should be doing as an investor.

I think that we all know that we’re our own greatest enemy when it comes to investing. So the challenge that we face is people think they can beat the markets. They try to go at the markets from the perspective that if I can beat the market, I’m going to be rich.

We have all kinds of different analogies...I was speaking earlier here. One of the things that we did was this: this is an Apple phone, which is produced by Apple, so it’s stock. This is your money. So if I put my money into Apple and I now own the stock, the greatest thing I have is risk. If I don’t manage the risk of owning this stock, I lose my money.

What people get enamored with is this [phone]. They get enamored with the stock. The reality is, it’s managing the risk of the asset. So, when I put the two together, I have risk.

Now, how do I manage that risk? Predominately, it's the use of stops, it's use of market trends, you can use technical fundamental analysis combinations...but it's various methods of doing that.

How do you focus on sectors? Explain that.

Well, for sectors, the biggest thing is that we look at the market from a top-down approach. So if we took all the major indexes and we said we’ve got the Dow, the S&P, the 500, the Nasdaq—throw in the EAFE Index, all of the foreign indexes—scan across them, look for trends, look for fundamental growth, economic platforms, and then filter down.

What we find is most people are filtering for everything...but find the moving sectors. If you find the moving sectors, you’re going to find the needle a lot easier, the proverbial needle in the haystack. So, look for the moving sectors and the components, but we filter down. We go from the top indexes down to the sectors, down to the subsectors, and then to the stocks.

Now what sectors do you see that are strong now?

Currently, I think one of the things you’ve got to look at is tech. I think if tech does not continue to lead this market, we’re going to stay range-bound. We need to see that.

Small caps are another component of the market we would like to see, but those are the growth sectors. So, the growth sectors, they’ve picked up more towards the mid to late part of the year here. If they continue that trend, we’ve a chance maybe of breaking out of the trend.

If we don’t and we start to see utilities, energy, the defensive sectors come back into play—consumer staples, which we have seen in the last three or four days—but the challenge is who’s going to take on that leadership. That’s where we’re seeing the take and give right now. That’s why we’re channel-bound.

Well, that’s excellent. Can you give us any particular names that you like right now in those sectors?

Well, if you look at the tech sector, the iShares Software ETF (IGV), because software has been the acceleration component of that. We like that.

One of things we do is once we find a sector we like, we dig down into it. If you look there, I think Oracle (ORCL) is probably the big winner in the software sector. I think Microsoft (MSFT) is going to plod to the upside. It has a good longer-term outlook, but I like Oracle probably the best there.

If you filter down into it, there are some others. One of the software pieces that we are seeing move is gaming software. So, it’s worth digging down and seeing some of those pieces.

Related Reading:


Overlooked Small Caps with Big Yields
The Top 4 Sectors (and Stocks) for 2012
3 Big Big Trends to Watch in 2012

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