New Top 5 Sectors

It's been said that roughly half of a stock's price move can be directly attributed to its group.
A strong Sector or strong Industry will have more of its companies moving higher than a weak Sector or weak Industry, because, by definition, a Sector or Industry is simply a group of like-minded stocks.

If the majority of stocks are going down in an industry, it can't be a strong industry. But if more stocks are going up, it is a strong industry.


I've done some testing and found that, oftentimes, just getting into an average stock in a strong group will often outperform the best stocks in a troubled group.

This doesn't mean you can just pick anything and you'll make money. Far from it. But it illustrates how powerful the underlying group is to the success of your stock picking.

Defining the Top Sectors

There are several ways you can define the best Sectors or Industries.

One of my favorite ways is to look at the percentage of stocks trading within 10% of their 52-week highs.

A lot of people like looking at the percentage price change over the last 12 or 24 weeks. And thats fine but I dont think its sensitive enough.

Take the Oil and Energy sector for instance. If you look at it based on its 24-week or 12-week price performance its one of the top sectors. But its actually one of the worst price performing groups over the last 4 weeks.

The reason why the 12- and 24-week dont reflect this is because if the gains were so large early on, then even a large pullback will be lost within the larger run-up that preceded it.

But by checking their position in comparison to their 52-week highs, a simple 10% pullback from their 52-week highs will show up. And if more and more companies within that group are pulling back from their highs by more than 10%, itll be reflected in that Sectors rating and alert the investor that something systemic might be happening to that group as a whole rather than something thats just stock specific.

And like I said at the beginning, since roughly half of a stocks price performance can be directly attributed to the group that its in, its important to be able to identify the best Sectors quickly and accurately.

So what are the New Top 5 Sectors?

The top five Sectors based on the percentage of stocks at or within 10% of their 52 week highs are:

1. 1 Finance 21%
2. 2 Aerospace 19%
3. 3 Retail-Wholesale 17%
4. 4 tie between:
Consumer Staples 16%
Construction 16%

I should note that the percentages are awfully small. Prior to this year, a Sector would typically need more than 50% of its stocks trading within 10% of their 52-week high to get into one of the top spots. These lower numbers are just a
reflection of the kind of market we're in.

By the way: the Oil and Energy sector dead last.

Finding the Best Stocks in the Best Groups

Most great stocks come from great groups. And they often have some great peers as well.

If you find yourself in a killer trade, take a look at the characteristics of THAT STOCK and then hunt within its group to find OTHER STOCKS that share the same characteristics.

Does a certain outstanding stock exhibit great sales growth? I'm sure there are at least a few within its group that are also showing similar numbers.

What about increasing margins? If the stock is doing well, it's likely that the industry itself is experiencing meaningful increases in margins too.

This type of screening is often called 'modeling'. Figure out the components of what makes something successful and concentrate on that.

If you see great stocks in great groups while you're bemoaning your misfortune in laggards or non-movers, find what stocks are successful and model them.

Here are a few stocks from each of those current top sectors (for Tues, 9/9/08):

HCBK Hudson City Bancorp, Inc. - Finance
COL Rockwell Collins, Inc. - Aerospace
FRED Freds Inc. - Retail-Wholesale
PEET Peets Coffee & Tea, Inc. - Consumer Staples
DHI D R Horton, Inc. - Construction

By: Kevin Matras

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Kevin Matras is the Research Wizard Product Manager and weekly contributing Editor at Zacks Investment Research who creates and writes the Zacks Commentary Screen of the Week. For more information, visit www.zacks.com