Sectors & Themes:

As of February 2009

As a resource, the following table outlines sectors and themes worth considering, but you should do your own research to find new leadership.

Note: ETF=Exchange Traded Fund; MF=Mutual Fund

Sector/Theme	Comment	Ideas for Consideration
Greatest Opportunities in 2009	The most important decision in 2009 will be the direction and magnitude of interest rate change. The second most important decision will be when to get back into the market. You don’t have to hit the exact bottom. Pay attention to IBD indicators and common sense. Even if the market goes to a Buy, look to see if individual stocks breaking out of strong bases? The third most important decision will be how you should use ETFs to minimize the volatility that will remain in the market on individual stocks.	Monitor IBD Market Signals and review the ETF Table.
Layered Investing	Short selling is out of control. As long as it remains legal, it is a plague on free enterprise, because it allows speculators the unbridled ability to destroy a company’s capital without any objective consideration of value. The slight narrowing of the bid/offer spread does not out-weight the damage to markets. To diversify, the average investor must use layers of selected market indices, ETFs, actively managed mutual funds and individual stocks.	Write Congress and the Securities and Exchange Commission (SEC) demanding that they outlaw short selling of stocks, ETFs and stock indices, including derivatives.
Active Management (Stock Picking) vs Indexing	With many major stock indices heavily laden with financials, autos, retail and real estate, stock pickers and well run actively managed mutual funds will outperform most stock indices during the next several years. The exception will be mid and small cap indices.	See ETF Table and Picks.
Mid-Cap vs Large-Cap stocks	The law of small numbers means that when a slow recovery comes, large companies have to generate a much larger dollar increase in sales to get the same percentage increase as a mid to small company. In addition, mid-cap companies will be targets of large companies. When the market turn is signaled, I would consider using ultra mid-cap ETFs as a core holding. (These ETFs double the return of the index (up or down).	ETF: MVV (2 x S&P MidCap 400). Maybe SAA (2 x S&P SmallCap 600)
ETFs	Sector ETFs can be bought, thus reducing the risk of adverse surprises or short selling of a company.	See ETF Table.
ETFs then Individual Stocks	Once an ETF does well, drill down to identify the leading stocks in the sector and consider buying them if they meet other ODDS-ON criteria.	See ETF Table.
Funnel Investing	Look for stocks that many companies must use. For example: retail: UPS or Fed-Ex. This diversifies risk. Look for non capital intensive companies with strong free cash flow. (PEG less than 1.0. The funnel approach also applies to picking ETF sectors.	The Energy Sector: DIG, OIH, USO, USL. Basic Materials used to rebuild infrastructure: e.g. Steel-SLX.
Cash	I am not a market timer. Cash is my defensive position (Not bonds or medical stocks, etc.) Values drive my cash position. By Values, I mean a combination of a PEG ratio below 1.o, debt below 25% of capital, a projected 3 year growth rate above 20% and IBD technical analysis indicating that institutions are buying the stock. By cash, I mean high quality short term money market funds such as Fidelity Cash Reserves, (FDRXX)
Bonds	With 20 year bonds at 2.6% and a world awash in liquidity, sometime in the next two years, Treasury rates will go up. (Note that while corporates will go up, offsetting that increase will be a reduction in the credit risk spread.) Consider going short 20-year treasuries.	ETF: TBT (This is 2 x the inverse of 20 year treasuries.)
Energy	Depending on what, if any, energy policy comes out of the government consider some of these energy related ETFs.	ETF: OIH, TAN, NLR, KOL After Gasoline nears bottom, consider UGA
Rising Dollar	If the US begins the economic recovery ahead of other countries, the dollar may rise and you will not want to own multinationals that are in slower growing international economies and have to translate earnings back into a stronger dollar.
International	Later in the economic recovery, ETFs for various international markets will work. We need to see which sectors of the economy begin to recover.
Price Levels and Commodities:	When the economy and markets turn, there will be concerns about inflation caused by low interest rates and inflationary rescue packages. ETFs may be the best way to play this.	ETFs: DBC, DBA, DYY