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.

For The Best Trading Books, Video Courses and Software To Improve Your Trading Click Here