Leadership change | stockbee


Leadership change

The most important thing which happens in a market correction is sector and individual stock leadership change. If you can spot such changes systematically, you have an edge on the long side in the next up move.

The problems with corrections is they can cloud your judgement. The bearish story looks appetising. You start believing the chronic bears are geniuses. You start perfecting your short strategy. More than that the experience of painful and sudden losses for unprepared trader or those trying to chase sudden and vicious moves, can often lead to confusion and lack of focus on things that matter.

Corrections focus attention of traders on sectors or stocks which have problems. In some cases those problems are real, some cases perceived. In many cases the panic leads to irrational claims and warnings of dire scenarios. But what happens after the sell offs like we witness recently is more important for opportunistic speculators. The opportunity for money making after correction is in new emerging sectors.

Corrections lead to dramatic change in leadership. If you have seen in last few days sectors which were in rally mode just a few weeks ago have lost their leadership. The financials and brokers are the obvious ones. Other sectors like airlines which were on tear have also lost leadership. Now if you are value investor or vulture investor or special situation kind of investor obviously you should focus on the wreckage, but if you are a momentum/growth investor you should walk away from the wreckage and smell the new emerging opportunities.

The nature of market is such that when every one focuses their attention on mortgage sector, home builders, and financiers, a new set of sectors and stocks silently start their march upward. While the crowd is busy watching the wreckage and too scared, new opportunities spring in new sectors.

Energy, health care and technology, select technology, aerospace/defense and some niche sectors like funeral services have quietly started gaining leadership in last couple of weeks. The future opportunities are in those sectors.

Monitoring actionable trends in sectors is key to quickly grabbing next set of long opportunities. There are many ways to monitor sector. The key is to find the shifts in leadership early enough so that you can benefit from the move.

Some of the ways in which I monitor sector trends are:
  1. By everyday sorting the 4% plus breakout list by sectors and ranking sectors by number of stocks. By looking at trends in this over a week you get heads up on new sector moves. All sector moves start with number of stocks in them having a high volume 4% plus breakout.
  2. The other thing I monitor daily is in the IBD 52-Week Highs and Lows page, on that page there is a list of "Groups with highest % of stocks making new highs". If you monitor that list daily you again get a heads up on new emerging sectors. If you go back and see the list for last few weeks, you can spot where new leadership is emerging.
  3. IBD's 197 Industry Group Rankings. Here I focus on the first two rows. You have to constantly look for sectors climbing up. In the IBD forum every weekend someone posts a file of the sector with several weeks data. The file is visually presented in green, yellw and red colorrs. It makes spotting trends in sector very easy. The trick is not to look at top sectors but the one which in next 4-5 months will rise to top.
  4. By sorting the 100% plus list by sector.
  5. By sorting the 65 days 25% plus movers list by sectors.
Another very good way to monitor sector leadership is by tracking IBD sector focus. There is lot of method to the stocks and sectors highlighted in IBD under their sector focus . When IBD identifies a sector with potential future leadership it goes all out and does saturation coverage of that sector for weeks or months.

If you have noticed IBD did saturation coverage of airline sector during its entire move. It started its saturation coverage in June, July, and August when the group was showing early signs of leadership with several stocks breaking out with 4% move. Those stocks in last 7-8 months made 100 to 300% moves since IBD started focusing on them. Same way the health acre sector and stocks like HRT, CYNO, ROCM and many others have risen 100% plus since IBD started focusing on the sector many months ago. Sometime later I will have a post on how you can make lots of money by studying IBD in microscopic details.

Earnings period and corrections are two times when a change of leadership in sectors happen. If you can systematically track and identify such sector moves early in their price appreciation cycle, you can benefit by the pop corn effect. When a sector gets going a stock after stock in it starts popping up.

If you are looking for money making opportunity just follow the new emerging sector leaders.....


fivepercentstocks said...

A great analysis- keep them coming. I am also bullish on Healthcare, Energy. The analysts seemed to have Funeral Services pegged a while ago, it's been toward the top of the ABR sectors for some time. I think it will continue to be solid.

Rahul said...

Now this gives me a lot to think about...and work to do.

Sectors are a very important part of my trading methodology. But I have never looked at them in such a fashion and go looking for leadership change. I just look at sector indices charts to see where the moves are.

Thanks for sharing your sector tracking methods. I need to look into some of those.


James said...

things for sharing. I will try to look at stocks grouping more closly.

~Brew~ said...

I am going to subscribe to IBD.
Would you recommend tha paper or
digital version? Also, what chart
screener would you use if you were not currently subcribed to one?

Thanks Brew

Pradeep Bonde said...

I use the paper version. I find the digital version too cumbersome.
I use TC2000 software.

Jim said...

can you clarify the term "sector" you used in this post?
is "sector" in this post means the same as IBD industry group? or some other site grouping such as Reuters?