It's always a popular request from our readers to hear our forecast for the upcoming year. In stock options we're mainly concerned with short-term predictions, but we've enjoyed success at long-term forecasts too. In late 2006 in Business Week's Fearless Forecasts from the Pros, Price Headley predicted the Dow to finish the year at 13,600 and at this rate he could be the most accurate. Now we're more concerned with 2008 and making it a great year. That being said, let's analyze our economy's biggest sectors to make investing in 2008 the most profitable year for you.

In order to properly analyze our sectors, let's first get a handle on the economy as a whole. The probability of a recession has risen in recent months according to many analysts. By most estimates it's about a 50/50 chance and we'll take this into consideration, but it wouldn't be prudent to bank on any one outcome. In other words, don't bet the portfolio on one outcome--diversify. In the last six months of 2007 investors saw extremes, and extremes are generally great for forecasts because those radical movements aren't sustainable. By our count, we've seen one of the most diverse years in terms of gain/loss per sector. On the extreme losing side there are Financials and Housing stocks, but on the extreme winning side you have Energy and Technology. Your 2008 can be the best trading year if you begin with a birds eye view to plan your attack. A great way to ensure profitability is to determine the probable strong sectors and allocate your trades in such a manner that represents that belief. Here's how we see some major sectors performing in the next 12 months.

Technology

The Technology ETF, which represents the tech stocks in the SP500, is up 15.48% as of December 28, significantly outperforming the market. Such an out performance typically screams for a correction, but we do not believe this will happen. Most recently the sector has cooled off leaving room for growth. And there are too many growth opportunities here to adversely affect the long term results. For example, international growth will keep tech stocks ahead of others that are more reliant on the domestic economy. In particular, technology services should continue to thrive. Take a look at the double bottom with resistance at the 50-day moving average (Blue Line) in August and late November; this is a great set up for continual growth in 2008.

SP500 Technology SPDR (XLK)



Healthcare

We're concerned with the notion that Healthcare stocks are recession proof, too many investors are aware of the past performance (during recessions) and this broad knowledge could lead to overvaluations. On the other side, 2007 yielded light returns with 3.02% as of December 28, giving this horse room to run. We see strength here for 08; however, it's hard to overlook the possible implications of a new administration in Washington. Universal healthcare, if implemented, would have a dramatic effect on healthcare bottom lines.

SP500 Healthcare SPDR (XLV)



Energy

The SP500 Energy stocks are up 37.08% as of December 28, making this our beware sector. The sector has been in a long-term downtrend since October with a potential correction in the near term. From a fundamental perspective we see mounting pressure from solar energy and even the recent Energy Bill that could relieve demand on traditional energy sources leading to further decline.

SP500 Energy SPDR (XLE)



Financials

Perhaps the biggest laggard this year is financial stocks, which have endured losses again and again. As of December 28 the sector has lost 21.23% in 2007, largely driven by sub prime losses which will continue into 2008. The debate on whether we've hit bottom continues as we recently saw Warren Buffet purchase a bond insurer in desperate condition. This may be enough proof for some investors that a turnaround is here, but not us. From a sector analysis we haven't seen signs of a long-term reversal trend appear. Overall, we see volatility reigning here, and with the credit crisis still in play investors can find better places to profit. We're starting to see a convergence of the 50-day moving average and 200-day moving average signaling more bad news for financials.

SP500 Financial SPDR (XLF)


In a recap, we see many similarities in 2008 compared to 2007. Technology stocks are positioned the best to profit from international growth, and healthcare is positioned for a breakout too. Volatility will still consume financial stocks until losses are quantified (which may not be until 2009). Finally, diversification remains a necessity in 2008, especially with continued volatility. We wish you all a Happy New Year.

Price Headley is the founder and chief analyst of BigTrends.com.