Pinpointing Tomorrow’s Strongest Stocks Using TM’s Market & Sector Indicators Page
Identifying leading sectors and industry groups should be a part
of most traders’ nightly routine. The reason for this stems from the fact that
much of an individual stock’s movement is tied to the sector to which it
belongs. Buy a strong stock in a weak sector and you may wind
up with bad results. Buy a strong stock in strong sector and the odds of a successful
trade are going to be much, much better.
As mentioned in “Know
the Sector Before You Know the Stock” and “Beyond
the Setup,” it’s important to maintain a continual awareness of where the sector leadership
in the market is, both to the upside and downside. Since it is rotating
continually, you need to reevaluate where the money is flowing to every single
night. That allows you to key in on the stocks that are likely to produce the most
powerful momentum-driven moves. Together with other nightly research — such as
identifying stocks with the highest and lowest relative strength, strongest and
weakest trends, surging volume, and tradable patterns — identifying sector
leadership gives you an edge long before the opening bell.
The redesigned TM
Market & Sector Indicators page was designed to help you quickly find
the strongest and the weakest sectors of the market. In an effort to better help
you find the leaders and laggards of each sector of the market, we’ve also moved
our ETF indicators to the same page. The popularity of ETFs has skyrocketed over
the years, making them not only a great trading/investment vehicle, but also a
proxy for a market sector. Here at TM we show you how each sector has performed
relative to other sectors of the market in five different time frames. Whether
you’re a day-, swing, or intermediate-term trader, these lists can help you zero
in on where the money is going.
Where to focus each night…
Like a pack of wolves or a school of sharks, stocks usually move
in groups. This is due to certain economic, fundamental or business
environments that favor certain sectors of the market. Just as in times of
weak markets, defensive issues will usually outperform, so keep an eye out for
defensive sectors, such as foods, utilities and gold. Whether we are in a bull
market or bear market, money is constantly being shifted around to different
areas of the market where business conditions are most favorable. Institutions
such as mutual funds and pension funds will shift money into the strongest or most
promising sectors and take money out of the weak sectors. Therefore, it is
important that you trade in these stocks. In “How
To Make Money In Stocks,”
O’Neil cited that over two-thirds of stock market winners were part of group
advances. By buying stocks in the strongest sectors and selling stock in the
weakest sectors, you are stacking the odds in your favor.
A powerful advantage of following sectors…
Here’s one of the key things you should commit to memory.
Sectors and industry group leadership tends to shift slowly. Once an idea has
caught on with the institutions and the trading public, it tends to stick. So
for weeks and months at a time, a particular sector or group of sectors can
remain at the top of the ranks. Go to the TM
Market & Sector indicators page and open some of the charts of sectors
that are among the leaders. You’ll see many cases of healthy trends in place
that allow you to maintain your focus on where the action happens to be. If
you want to see how this plays out in actual practice, definitely read Kevin
Haggerty’s column every day. You’ll find that when specific sectors take
control…he’s all over them.
How you can use the list…
There is no right way or wrong way to use the indicators. Our
goal in compiling these lists is to help you easily identify the
strongest/weakest sectors so that you can find the strongest/weakest stocks.
However, before you even identify the strongest or weakest sectors to trade,
it’s a good idea to check the market
bias page for any directional biases for the upcoming trading day.
We compile relative strength numbers in five different time
frames from one week to one year to help you see how each sector of the market
has stacked up against another during each period of interest. These lists
will help you identify strongly uptrending or downtrending sectors, whether you
are a day-, swing or intermediate-term trader. And instead of clicking through
all of the indicators, we have included the RS numbers on all indicator pages
for easy reference. By glancing at these each night, you can quickly find
sectors that have been trending or downtrending, as well as have an eye for
sectors on the rise.
For day- and swing traders, look at the one-week, one-month and
three-month RS numbers. The one-week number will not only tell you what have been
the best- and worst-performing sectors during the week, but it can also point you to
sectors that are on the rise (decline for shorts). The one- and three-month
numbers will show you sectors that have performed or under-performed
in a longer time frame. This is a good place to find the sectors that have been
uptrending or downtrending.
For intermediate-term traders, focus on the three-month, six-month and
12-month RS numbers to help you find more established trends.
Then you could head over to Boucher’s top RS and ER highs
and lows
lists to find possible trade candidates.
Example
On 1/18/2002, we see that the biotech sector was among the worst-performing groups according to the TM
Market & Sector indicators page.
Upon looking the chart, we see it is in a rather robust looking
downtrend. It is staging a series of false rallies, each time hitting new
lows. Also, if you follow Dave Landry’s Bow Tie Methodology, we
see that a bow tie sell signal was triggered over a weak earlier, suggesting
a change in trend. Two days later the
(
BBH |
Quote |
Chart |
News |
PowerRating)s then pulled back off its lows before
encountering resistance at its .618 retracement level from the Nov. 27,
2001, high.
Looking at some biotech issues (as of 02/08/2002), we find possible short-sale candidates
in Medimmune
(
MEDI |
Quote |
Chart |
News |
PowerRating), Genzyme
(
GENZ |
Quote |
Chart |
News |
PowerRating), IDEC Pharmaceuticals
(
IDPH |
Quote |
Chart |
News |
PowerRating)
and Shire Pharmaceuticals
(
SHPGY |
Quote |
Chart |
News |
PowerRating). Or you could have traded this sector by using the
Biotech ETF itself. Using the BBHs, you could have used a simple pullback
technique, and you could have entered a short once it broke below its 1/23/02
lows. By doing so, a short trade would have been triggered on 1/25/02 at 122.90.
Then the BBHs resumed its downtrend and traded as low as 114.21 on 1/30/02.
Be sure to check out the TM
Market & Sector indicators page regularly to help you find the market’s
strongest or weakest sectors.