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Pay Attention To The Sector

 

By Price Headley, President and CEO
BigTrends.com

Article Posted On Jun-24-04 7:37

Price Headley's Daily TrendWatch
June 24, 2004
Pay Attention To The Sector

Today we're going to take a bit of a detour from our usual focus on technical trends, and devote some time to an often-overlooked reality. This will be an important TrendWatch to both traders as well as fundamental investors, as we explore why picking the right sector is just as important as picking the right stock.

While the overall market has been rallying nicely over the last few days, if you have a truly diversified portfolio, you'll have noticed a few weak spots. Odds are that your energy stocks have done very well, but you were probably even more surprised to see how well your basic materials stocks did, such as International Paper (IP), Alcoa (AA), and Phelps-Dodge (PD) just to name a few. In fact, the materials sector helped to lead the charge with a one month return of 8.3%, second only to the energy stocks.

On the other hand, you may be lamenting healthcare. Health stocks were almost the weakest performers of all, only gaining 1.9% over the same one month period. That sad performance was only slightly worse than technology's results; those stocks only managed to gain 2.5% over the last month. Neither even kept pace with the S&P 500.

Each sector's performance is ranked in the chart below, descending from the best to the worst performing sectors over the last month. Performances over other time periods are listed as well, but we want to focus in on the stocks and sectors that have emerged as leaders in this most recent recovery.

Sector Performance Ranking - One Month

But what does this mean to you? While there are always exceptions, it is estimated that 20% to 50% of a stock's price movement is related to its sector and/or industry movement. In other words, while your capital goods (industrial) stock may be a strengthening company, those shares owe a big chunk of their recent gain to just being in the right sector or industry at the right time.

Even sub-sector or industry weakness can drag a stock down. Take for-profit schools as an example - a relatively obscure industry in the broad 'services' group. It was reported yesterday that Career Education (CECO) was being intensely investigated by the SEC. Although the intent of the investigation is still unclear, most analysts agree it is related to the possibility of falsification of student records. CECO shares were understandably lower, by 24.7 percent. However, that weakness was contagious to the other major companies in the industry. The five biggest (market-cap) for-profit schools all pulled back yesterday, even though the SEC probe is limited to the Career Education Corporation. Talk about being associated with the wrong crowd!

The bottom line is simple: buy strong stocks in strong sectors, and avoid stocks in weak sectors. That's why we created the performance table you see above. This data is telling you where the real strength is developing, and where it's not. If you're able to, narrow that focus down to the specific industry. You may also want to compare earnings and revenue growth rates. Or to put it another way, don't go against the grain. You can see where the strength or weakness has been in the chart above, but I encourage you to keep abreast of each sector's performance, as it will most certainly change as time passes. You can bet that your individual stocks are probably doing about as well as their sector is.

If you'd like to learn more about capitalizing on sector and industry strength, Bill O'Neil is a seasoned authority. You can read about this topic in his book How To Make Money In Stocks.

KEY SUPPORT AND RESISTANCE LEVELS

SUPPORT RESISTANCE
Nasdaq Composite 2000 2040
S&P 500 1135 1155
Dow Industrials 10,400 10,600

The data contained in this report has been carefully compiled from sources deemed to be reliable, but accuracy and completeness are not guaranteed.

There is risk of loss in all trading.

Price Headley is a regular contributor to MarketMavens.com. He is the founder and chief analyst of BigTrends.com's daily stock and option newsletters. Timer Digest recently recognized BigTrends.com's successfully strategies by ranking Price among the Top 10 Market Timers for 2000. As a recognized market timing authority, Price has been widely quoted by AOL Market Talk, CNBC, Bloomberg, The Wall Street Journal, Reuters and Barron's.