Editor's note: "Buy and hold" is great advice... unless it leaves you holding investments that trail the market. According to Vic Lederman from our corporate affiliate Chaikin Analytics, one sector is falling behind today. In this piece – which was first published in the October 10 issue of the Chaikin PowerFeed e-letter – Vic shares why a long-term strategy isn't always good enough...

Don't 'Buy and Hold' This Bearish Sector

By Vic Lederman, editorial director, Chaikin Analytics

In today's market, we can't just blindly follow the "buy and hold" mantra...

But you might know someone who would never sell a particular stock. I know folks with that kind of mindset.

In decades past, this might have made sense. Back then, household names like consumer-goods company Procter & Gamble (PG) and telecom firm AT&T (T) dominated the market.

They provided goods and services. And their recipe for stock gains was simple...

Straightforward companies like those produced more goods and services at better prices. Their margins grew. And they returned more value to shareholders.

It was a simpler time.

Now, some things never change. But there's no question that today's market is a little different.

For example, tech companies have run unprofitably for years before spiking higher...

Amazon (AMZN) was famously "unprofitable" from 1994 through 2003. The company expected investors to understand that one day, it would just "flip on the money switch."

So I understand if you yearn for buy-and-hold companies.

But folks, one sector is packed full of "simpler" companies. And it's one of the worst sectors to invest in today...

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Now, I'm betting you haven't guessed which sector we're talking about. After all, just about no one is thinking about these stocks.

But that's the problem. In today's market, they're just too simple. And the Power Gauge indicates we should avoid buying and holding them today...

I'm talking about the materials sector.

We can see the problems in this part of the market using the Power Gauge. That's a tool we use at Chaikin Analytics which gathers investment fundamentals and technicals into a simple rating of "bullish," "neutral," or "bearish."

The Power Gauge tracks this sector through the Materials Select Sector SPDR Fund (XLB)... And it's currently the second-lowest-ranked top-level sector in our system.

That's because of the sector's Power Bar ranking. The Power Bar gives us a visual representation of the number of bullish, neutral, and bearish stocks in a specific index, industry, or fund. Take a look...

As you can see, right now, the Power Gauge only rates one stock in XLB as "bullish." Nineteen of the fund's holdings are stuck in "neutral" mode. And seven earn a "bearish" rating.

Let's look at one of XLB's holdings, chemicals and plastics producer Dow (DOW)...

Dow is exactly the kind of household name you would think to buy and hold. And its business should be straightforward.

Despite that, the broad market has clobbered Dow in recent years. The chart below shows the big underperformance...

Over the past five years, this chemical giant's stock is slightly worse than flat. Meanwhile, the broad market has soared roughly 92%.

If you had bought this "obvious" blue chip back then and held on this whole time... the market would have left you in the dust. And right now, the Power Gauge gives Dow a "very bearish" rating.

Folks, this is the crux of the problem investors face today.

You don't need to whip in and out of positions. But simply buying and holding a "good name" isn't enough.

One look at Google parent Alphabet (GOOGL) in the Power Gauge makes this clear...

Alphabet has soared about 168% over the past five years. It has obviously crushed Dow over that same time frame. And it has also beaten the broad market.

But even then, you can see clearly on the chart that using the Power Gauge would have helped you avoid the worst of the "tech wreck" in 2022 – that is, if you had let go of the buy-and-hold approach...

Just before that year started, the Power Gauge slipped firmly into "neutral" territory for Alphabet. And you can see, using our proprietary measure of relative strength, that the stock was clearly underperforming the broad market for just about all of 2022.

As I said, you don't have to whip in and out of positions to take control of your portfolio. Your strategy can be as simple as using a tool – like the Power Gauge.

You just need to know which way the wind is blowing. For example, the wind isn't blowing in the direction of materials right now.

Then, make sure you don't blindly fall into a buy-and-hold trap.

Good investing,

Vic Lederman

Editor's note: There's a huge disconnect in the market right now – and it's creating a rare opportunity to grow your money, faster than usual, on stocks you may never have heard of before...

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