April 19th, 2008

Emerging New Leading IBD Groups or Dead Cats Bouncing

I’ve been a long time admirer of IBD’s Industry Group ranking system but, for the past several of months, I’ve been having trouble relying on their data. Let me explain.

IBD’s ranking system accurately highlights, I believe, the groups that are currently out-performing the rest of the market. The daily newspaper prints the rankings and even boldly outlines the best and worst performing groups; top performing groups as of today’s close were:

This works if you haven’t already loaded up stock in these winning groups. But what I’ve been doing is trying to zero in on the industry groups that might have future winners. Being in the top is great but, I believe, ranking somewhere below or around the mid-point but moving up rapidly might be even better. Finding good chart patterns amount these groups, I believe would allow me to get in earlier and to ride the stocks from the beginning of their moves.

That’s what I did back at the beginning of 2007 (see what I wrote, for example, on March 7, 2007 and March 23, 2007). But it doesn’t seem to be working now either because of the market’s performance since January or because the proprietary algorithms IBD uses to construct the rankings only work when the market is in bull mode and most groups are moving up.

The methodology I used in early 2007 to identify oil & gas stocks today is highlighting groups that look like “falling knives”. Many stocks in the groups have taken huge hits and most don’t seem to be anywhere near forming bottoms or bases. Here are the Industry Groups that have risen more than 50 positions in the rankings over the past 4 weeks:

True, these groups include only 234 stocks and excluding the 86 Oil & Gas stocks brings the number of candidates down to 148. When you scroll through the stocks of the other groups they look like they have merely benefited from a bounce of deeply discounted prices. A sort of groups moving up more than 50 since 2/22/08 doesn’t look much better.

I trust IBD and I think this phenomena is caused by the steepness of the declines. I don’t think we’re seeing a v-shaped stock market recovery but rather a dead-cat bounce. For the time being, it’s safer just to stick with the leading industries and individual stocks making new highs.

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