March 23rd, 2009
Regular readers here are familiar with the various ways I’m capturing stocks I believe will be leaders as the market continues to build a base and transitions from distribution to accumulation phases in its life cycle. Another tool for helping find future leading stocks is the rankings of IBD’s Industry Groups.
One of the critical components IBD uses in calculating Group rankings is the performance of stocks comprising the Group relative to the overall market. Industry Group stocks that outperform the market (as measured by the S&P 500 Index, for example) move up in rank; Industry Groups that have poorer performing stocks drop in ranking.
This is unabashedly a momentum strategy. In short, it assumes that not only does current ranking indicate the best performing Industry Groups but it also assumes that there’s a high probability that Industry Groups that begin to outperform the market (move up in rank)) will continue to outperform the market for some time – perhaps a quarter, 6 months even perhaps a year – until they are near the top ranking where the only direction, some time in the future, will be a lower ranking and worse performance than the market average.
Again, a critical element of Industry Group rankings is relative performance. In a Bear Market Crash, a high ranking doesn’t mean stocks in the Group are increasing; it only means that the average stock in the Group may not be declining as badly as the total market.
This past Friday, the Industry Group with the second greatest increase in ranking was the Metal Ores Industry Group. This week, the Group was ranked 46 or 138 positions higher than the 192 of 4 months ago, 5 positions from the bottom. The following graph summarizes the history of the Groups ranking for the past several years:
What are some of the stocks in this group and do their charts have any of the patterns indicating potential reversal patterns described over the past several weeks? They clearly do. Some of the largest by capitalization (except for ZINC) are:
- RIO (Companhia Vale Do Rio Doce)
- BHP (BHP Billiton)
- RTP (Rio Tinto)
- PCU (Southern Copper)
- SLT (Sterlite)
- CCJ (Cameco)
- ZINC (Horsehead Holdings)
- for less risk, stocks should cross above the resistance trendline with above average volume;
- there will usually be other opportunities to buy the stocks after a breakout when they retreat to test the trendlines;
- a favorable market adds tailwind to insure a low risk investment;
- these are very volatile stocks that have fallen to fractions of their pre-Crash highs. If they do start moving up there will be many opportunities over the next several months and years;
- rather than buying individual stocks, the XME (Metals and Mining SPDR etf) has many of these stocks and has a similar chart pattern.