Will 2014 be a stock pickers market?

by Wayne Ferbert on January 23rd, 2014

Because 2013 was not! Going in to 2013, we thought that it would be a stock pickers market – meaning you would want to consider picking some individual stocks to out-perform the broader market. We expected to start to see some outlier performance.
We were wrong that there would be significant out-performers. Luckily, had you been invested in equities in 2013, you would have done just fine. The amount of outliers on performance was near all-time lows throughout the whole year! It was truly one of those “all boats rise in the tides” sort of a year.
You definitely would have been better off just picking indexes and saving all of that time on researching individual stocks. You could have put that time to better use on hobbies or your family time. Most stocks just tended to perform in line with the market – which was up +29% in the S&P500.
This chart shows the level of dispersion in the marketplace. Standard and Poor’s Index department produces this report monthly. It basically shows the level of outlier performers to both extremes – down and up. This index is fairly bound by the 4% low level and the 15% upper level. We are just hovering over 4% right now and spent all of 2013 between 4% and 6%. These are very low numbers. 
What does this data mean we should expect in 2014? That is difficult to predict and this index tends to be a lagging indicator - but it is certainly difficult to expect these numbers to stay this low infinitum. But what might cause these numbers to change?
We would fully expect a market correction to cause a spike in dispersion. Think of a correction as a storm – instead of all boats rising slowly in the tide, some boats get thrown on to the rocks and crash. That is a likely event in any correction. While corrections can certainly cause most stocks to decrease, corrections have a way of picking some stocks and sectors to beat up way worse than others.
So, if there is a correction, I fully expect stock pickers to be rewarded with out-performance – even if that performance might be negative. It is always better to lose less money in the market because of quality stocks in your portfolio than to lose a higher amount to the market index.
At Buy & Hedge, we are indexers at heart – and that tends to define a good 80%+ of our portfolio. But we like to exercise our ‘Inner Guru’ and make some stock or sector picks now and then. If there is a correction in 2014, it will certainly test the effectiveness of our Inner Guru stock picker.
So, here in early 2014, let’s examine our sectors and find the sector concentration we prefer for the year – or whether we are going to stay in the Energy, Financials, & Technology sectors we have been long for more than a year now!

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