The Big Picture For The Week Of Jan 13, 2008

No video this week.

This chart is a YTD comparing SPY to the healthcare stocks I own for clients.

The names are irrelevant and I doubt these names are any better, collectively, than any other six healthcare stocks.

This strikes me as more of a confirmation, or if you prefer an uh-oh, of what more and more people are coming around to; that the chance that a bear market has started is much greater than it was a couple of months ago. Obviously I believe a bear has started but that could still turn out to be wrong.

I also looked at a chart comparing SPY to a couple of tobacco stocks and a food stock and SPY lagged them too.

Two weeks of this sort of rotation either matters or it doesn't but if it does it is consistent with the type of rotation that usually happens at a time of fear about the economy.

Conversely four out of five of the industrials I own for most clients are lagging the SPY YTD. Again, nothing out of the ordinary there.

In trying to navigate what might be a bear market it doesn't matter that the industrial stocks I, or more importantly you, have are down what matters is how much industrial exposure you have. This is not a time for an overweight exposure, at least I don't think it is.

The cyclical nature of sectors is a pretty reliable over time. It may not work every time which is why my focus is on overweighting versus underweighting as opposed to zeroing out a sector.

This is not the easiest thing to get a hold of but stocks go down in a bear market. Finding the ones that that will somehow go up is difficult to do. So if you can realize that the stocks you own will go down in a bear market you can then focus on cutting back overall exposure as opposed to finding the equivalent of the tech stock that went up in 2001.

The obvious question that always comes to these types of posts why not get completely out. I think this is a huge bet. A couple of bets actually. One is you are betting that it really is a bear market. Another bet you are making is that you will know when it is over and so will know when to get back in. It is these turning points in the market where crucial mistakes are made. Avoiding extreme bets in either direction takes this type of mistake off the table.

From the always planning ahead file Todd Harrison (with a hat tip to Charles Kirk) is predicting that there will be a one week 10% drop at some point during 2008. That sort of narrow prediction is way outside my wheelhouse but if he is right that would cause a lot a fear, probably set the stage for a very fast and big snap back, even in the context of a bear market, and so I expect I would come out of my double short position if just for a couple of weeks.