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How to Get Back Into the Market Without Feeling Like a Sucker

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Scared investors fled the markets in droves since the economic downturn. The faint of heart left in late 2007; others threw in the towel at various points in 2008; the unluckiest gave up in March of 2009, at the market bottom. The broader market moved up 64% for the balance of that year.

But many were far from convinced that the bad times were over, so they waited for the double dip or for the other shoe to fall. But that didn’t quite happen. The broader stock market is up 10% year to date. While the year had it’s scary moments, alert investors surely noticed that gold hit an all-time record, moving past $1,400; they’ve heard their share of gold bugs warning that gold will continue to rise, and they may have even heard the opinion of esteemed hedge fund investor and commodities enthusiast Jim Rogers predict last year that gold was going to $2,000 within a decade.

These uninvested investors may have noticed that all sorts of commodities have soared, including base metals and crude oil. And the reason they keep hearing over and over again for these price surges is the insatiable demand from China.

Ahh, China. Those who pay attention to investment headlines have doubtless observed the spate of IPOs recently launched on Chinese markets. Reminiscent of the ’90s-era IPO craze in the U.S., companies such as Baidu (BIDU) have enjoyed quite a run. The stock gained 360% on its opening day; it has returned 795% since then; and the Bespoke Investment Group’s blog calculates that an investor who got in at the opening IPO price would be up over 3,000% since its August 2005 debut. The latest Chinese IPOs are doing great so far. Just launched Wednesday, (YOKU) is already up over 60% and Ecommerce China Dangdang (DANG) is up over 28%. Not bad returns for just two days.

Even conservative investors have no place to call home, with bond vigilantes kicking them out of a seemingly safe haven these past two years.

So what’s a sidelined investor to do?

The classic dollar-cost averaging strategy, whereby an investor builds his position slowly, perhaps in monthly installments, may seem unappealing to those who lament the long run-up they missed out on or are impatient to get both feet in. There is another respectable approach that avoids this psychological sting of buying high.

The fancy name portfolio managers give to this strategy is “sector rotation.” Yes, a lot of brave people have made lots of money in uncharted Chinese start-ups and with momentum in gold, but there are unloved market sectors that await a possible change in fortune.

An easy way for retail investors to gauge this would be to look at State Street’s nine sector SPDR ETFs. You will instantly see that while the market has had a healthy year, led by consumer discretionary and industrials sector stocks, that the health care and utilities sectors are both in the red this year. Think the new GOP Congress will kill Obamacare? If so, you can get in on the ground floor. The market so far does not seem to think this will happen, as the stocks remain moribund. But, already in today’s (Thursday’s) market, there appears to be a sector rotation to financials, which have underperformed this year, but have gained a whopping 1% on the day.

Despite the nearly two-year rally in stocks, opportunities remain for bullish investors to get in and not feel like a sucker.