Despite Market Doldrums, Some Sectors Shine

Oracle (ORCL) and Sun Microsystems (JAVA), for example, are two large-cap technology stocks whose correlation has broken down in recent months. A rising tide tends to lift all boats, and in the midst of a roaring technology bull market, these stocks moved in near lockstep. But when the asset class, namely Nasdaq, is rather trendless, you've got to be more cognizant to pick the right horse, in this case Oracle.

A similar pattern can be observed in shares of General Electric (GE) and IBM (IBM), both members of the Dow Jones Industrial Average. Obviously the companies operate in two varied industries. But for asset allocation purposes they are often classified in similar fashion: large-cap, blue chip, multinational stocks. When those stocks are in favor, as they were in 2006 and 2007, just about everything of that ilk enjoyed a bid. In the absence of a clear bull market, however, stocks that "should" move together often diverge based on their own economic realities.

It's for this reason I believe one is advantaged by focusing on sectors or investment themes with uniformly strong price action as opposed to finding the proverbial needle in the haystack.

For example, the recent outperformance of coal stocks has been accompanied by a broad rise in the entire group. From Arch Coal (ACI) to International Coal (ICO) to Fording Coal Trust (FDG), it's tough to pick a loser when an entire sector is on the move. The same thing goes for railroads like Burlington Northern Santa Fe (BNI), Union Pacific (UNP) or Kansas City Southern (KSU). All are uniformly strong.