Where to Invest During the Last Stage of the Market Recovery

The economic recovery is a funny thing. Just when things really start picking
up, the market narrows and many stocks are left in the dust. How does this
happen? Let me explain by laying out each step of a typical recovery: In the
initial stages of the recovery, the market generally experiences broad-based
strength. This is the rising tide that lifts all boats. Interestingly,
lower-quality stocks sometimes start out even faster in this stage than
higher-quality stocks because they were punished so deeply in the previous
selloff. Hopeful investors who want to make back what they lost all pile into
stocks. However, these low-quality stocks flame out fast about midway through
this stage as investors bank short-term gains and start getting serious about
their investments. It is of critical importance that you don't get caught up
in the hype. This is why, even though the hardest-hit sectors like financials
were seeing a rebound in April 2010 and the early months of 2011, I made sure to
steer clear. These stocks saw irrational buying pressure and had no fundamental
strength they quickly reversed and are trading as much as 60% lower. In the
next stage, we begin to see a shift of leadership into sectors some sectors
will perform significantly better than others. At this time, higher-quality
stocks are clear market leaders, but there still is a lot of correlation of
stock movement within individual sectors. A perfect example is when you see
Apple (NASDAQ: AAPL ) make a big announcement and the whole sector perks up.
Most of the gains go to fundamentally strong companies, but, for the most part,
everyone wins. Finally, in the third stage of a stock market recovery, the
market begins to lose breadth and power. This is because the market no longer
rewards all stocks for sector developments, but instead only bids up the
specific companies that are directly involved. This is the stage of the recovery
that will dominate 2012. In this environment, it is increasingly important to be
certain that you are not just in the right sector, but invested the right
stock(s) in that sector. This is the time the wheat is separated from the chaff
and where stock-picking prevails. This is exactly why I steered you in my last
article toward the hottest stocks in the hottest sectors with the most upside
potential. And right now, the majority of the best stocks have been confined to
three sectors namely, consumer staples, health care and utilities and within
these sectors are the best-of-the-best companies that will take the lion's
share of the profits. While I fully expect the sector strength to break down as
we work our way through the third stage of the recovery, we're in for a
spectacular rise. Just take a look at these four outstanding biotechnology and
drug companies that will be poised to surge higher in 2012: Jazz Pharmaceuticals
(NASDAQ: JAZZ ),