Three Sectors for the Downturn

NEW YORK (TheStreet.com) -- Popular sectors, like tech and retail, have run into a buzzsaw of selling pressure because recent economic data is raising doubts about the green shoots theory. Market timers have two logical choices in dealing with this downturn: They can stand firm and hope their positions survive, or pull up stakes and search for new venues where buying interest remains strong.

The most effective plan will utilize elements of both risk management strategies. For starters, it's a good time to close out marginal performers and reduce size in portfolio positions that show the greatest profits. Then use a portion of the freed-up capital and buy into sectors that show increasing relative strength compared to the broad market.

Three specific plays come to mind at this juncture: health care, international exchange-traded funds and the pharmaceuticals. Utilities and traditional defense stocks might also work down the road, but I don't think it time to commit to these recession-oriented sectors just yet, so let's focus our attention on the three rising stars.

The health care sector is a great place to add long-side exposure right now. Many of the reasons for avoiding these stocks are fading from view after a tough summer for the Obama administration. In fact, the odds are now favoring a modest reform plan that does little to undermine industry profits.

I don't believe that bullish outcome is baked into the stock prices of the major health care players yet despite the most recent uptick. That could change after Congress comes back into session next month. For now, let's focus on the strongest technical patterns because these issues should benefit most from the shifting paradigm.