Pinpointing
Tomorrow’s Strongest Stocks Using TM’s Market & Sector Indicators
Page
By Vincent Mao

TradingMarkets.com
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)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),
Genzyme (GENZ),
IDEC Pharmaceuticals (IDPH)
and Shire Pharmaceuticals (SHPGY).
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.