Stockbee: Sector Trends

Showing posts with label Sector Trends. Show all posts

Playing Sectors

March 15, 2007

When you study sectors moves over a period of time, you find some interesting things which again can help you design a better trading system. While most people have generalised knowledge about sector, if you can find sector specific behaviour then you have an edge.

There are always problem with sector based strategies as many new stocks are lumped in to some existing sectors and sector behavior evolves over a period of time. For example many sector grouping services lump the exchanges under business services sector, while they are a category by themselves. So when looking at young stocks I always look at its sector skeptically.

Now having studied earnings and momentum based strategies on sectors, there are couple of unique behaviours you will find which one can factor in to your decision making. Some of these findings are in public domain, but if you do your own studies you would find some sector specific exploitable anomalies. I have found few such anomalies which are not in public domain.

While I do not want to talk about them, some reasonably common knowledge ones are worth studying also. For example the retail sector has a very unique behaviour and your earnings and momentum models need to factor that in. I am perfectly happy to buy a relatively low relative strength retail play as my studies show buying at such juncture is more profitable than buying at high relative strength. Shorting retail sector also is profitable because retail trends generally tend to persist because of the nature of sector where if you get your strategy wrong, it takes lot of time to reverse that. Retail sector also shows predictable calender tendencies.

The technology sector is best for momentum trading. I am perfectly happy to buy a technology play with low earnings , if it has high relative strength. Again this has to do with unique nature of the sector. Biotechs are best bought on catalyst. Most of them will have an intense burst of price activity driven by news. If you chase momentum without catalyst in this sector , many times you end up buying the top as the burst in price is primarily driven by future expectations. Also you seldom find a biotech with good earnings. The biotechs which make 100% plus kind of moves in few months in one single intense burst have no revenue and no earnings.Some sectors are best played using value based strategies.

Some sector anomalies have persistence, while others stop working as more people figure out the same things. . So if you focus on finding sector anomalies, you get a unique perspective which most people randomly chasing chart patterns or indicators or quantitative techniques lack. If you can isolate a sector behaviour, you have an exploitable edge.

Leadership change

Labels: Sector Trends

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:

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.
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.
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.
By sorting the 100% plus list by sector.
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.....

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