INVESTING: Don’t give up on stocks, despite talk of bear market

The S&P 500 on June 1 set a rally high of 1,540. Now, it sits at 1,507. That’s the longest stretch of no forward progress since last summer. So, does that mean anything? There is no shortage of professionals telling us the next bear market is upon us. And with more than a few industries not participating for a while, it might seem the bears have a valid point.

Before you pull out the lifeboats, though, there are a few historical indicators to keep in mind. Battleships don’t turn on a dime, and equity markets don’t, either. There are two reasons I’ve been advocating staying invested in energy, materials, industrials and select technology stocks all year. No. 1 is that they have performed the best. The second reason is that, as this bull market gets closer to the end, there will be fewer and fewer sectors participating on the upside, and the sectors I mentioned above should be among the last to remain standing. That certainly has been the case since the market stalled in early June.

I know some people still talk about owning home-building stocks, but the sector has been getting killed recently. You can add utilities, finance, biotechnology, health care and consumer-discretionary stocks to the list of areas that haven’t seen new highs for almost three months. In other words, broadly based portfolios are not working for investors right now. At the same time, the S&P 500 did pop up to a new all-time high this month before falling back into its trading range.

I believe the rapid increase in interest rates that took place from March until the middle of June put a funk on a large swath of the market. Over the past five weeks, however, rates have settled down, with the 10-year now back under 5 percent. This will help put a floor under the equity market, limiting pullbacks to no more than 3 percent. Then it should be off to new highs again.

But the deterioration we are experiencing now eventually could prove the bears right. Major stock market tops get put in place over a period of time. In the heart of a bull market, the broad indexes are hitting new highs, and just about every industry is going along for the ride. As the bull gets older, fewer stocks move higher as profittaking claims wider appeal. The stocks that are still going up, though, begin to draw much closer attention as investors focus on the handful of areas that are still working.

Picture someone sitting around watching his Wal-Mart stock collect dust for another year. The investor gets frustrated after a while, as he thinks about his neighbor making so much money in Apple. Then he ditches the Wal-Mart and buys Apple. This is being played out by millions of investors, and it keeps Wal-Mart collecting dust and Apple reaching new highs almost every day.

The way to stay ahead from here is not to get complacent. I believe the major stock market indexes can continue to hit new alltime highs for another four months at least, but they will be taken higher by fewer stocks than at this time last year. If you focus on the sectors mentioned above, you can stay in areas that should keep gathering more investor interest, even as more and more stocks join the pile of stuff that collects dust.