March 14th, 2010

Breakout Industry Group – Restaurants

Many fundamental analysts look at the economic signs and read them all as pointing to a weak and even weakening recovery. These analysts offer as evidence the standard statistics we’ve all become acquainted with like negative job growth, high unemployment, continued weakness in the housing market, banks that continue to hold back on lending and a waning in consumer and business confidence. Regardless of the economic news, many retailer stocks in a range of categories (for example, apparel and shoe, food, super and mini-markets, electronics) have made significant moves since January.

It’s been some time since I reported on a group that pops out as a result of a dramatic increase in their Industry Group ranking: metal ores (March 22), steels (April 26), alternative energy including solar and coal (May 7), gold miners (May 11) and truck and automobile equipment manufacturers (June 1). Stocks in each of these Groups performed extremely well after they shot up in ranking (although a drop in ranking is inadequate for indicating when to sell).

The Retail-Restaurant Industry Group with 60 stocks, now appears to moved up smartly over the past several weeks from being ranked near the bottom (180th) of the 197 Industry Groups on December 14 to ranking 15th this past Friday (click on image to enlarge):

Many stocks in the Group appear to be or in the process of beginning significant bullish momentum moves out of long consolidation patterns. The Group is large, diverse and encompasses such subcategories as fast food, family and full service; some are purely domestic and others derive a significant portion of their revenues in overseas markets. The common denominator among them, however, is that many have good looking stocks charts. I could have picked many but the following will give you a clear idea of the breakout potential of stocks in the Group (click on image to enlarge):

  • YUM
  • CPKI
  • BWLD
  • CAKE
  • MCD
  • EAT
  • DRI
  • RT

I could have gone on and on but you get the picture. These aren’t 2-3 week trades. If the market cooperates, these and others in the group could generate some huge moves over the next 4-6 months.

A question I’m often asked is “You give us a lot to choose from but which do you think is the best?” So, coming up, answers on narrowing the field.

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  • Jesse

    looked at the first 4 or 5 and noticed that all of them are in extremely overbought conditions on the 3 and 6 month and 1 year charts. Wouldn't it be wise to wait for a significant pullback?

  • Joe

    Interesting but how do you measure "overbought conditions", what is your metric or indicator. And when do you know they aren't overbought or closer to "true value"?

    True the stocks are at or above the 2 std. dev. above 200 and 300 DMAs but they can stay that way for a long time. Furthermore, then can move up with rising MA's and not touch those MA's for a long time. Look at PNRA from Nov to now, as an example.

  • Jesse

    I'm looking at the oscillators & the Williams%R. on the later the % are near 0 for all of them based on the time frames I mentioned.

  • Jesse

    here's the 3 month for YUM – (not sure if this will post) This is ready to start selling off to me. http://img697.imageshack.us/img697/6906/yum3month.png

  • Jesse

    I'm sorry the chart is for BWLD – today's price is 48.46. Lets see where it goes from here.

  • Jesse

    Joe, any comments or correction for me. Am I not using these indicators properly?

  • Joe

    Jesse, you may be right but I'm a longer-term investor (6-12 mos., 40-70% targets). I'm not sure how long and what percent an "overbought" correction condition means.

    IMHO, the sort of indicators you refer (oscillators and Williams%R) are important to day than trend traders. No?

  • Jesse

    very true Joe. I was simply referring to waiting for a better buy in. When The Williams%R gets back to or around 100%, that's your buy in. I think you can use the indicators together. If you're not worried about a 5-10% correction in the short term and you're willing to just ride it out because you believe the long term trend is up, then no worries. No reason to feel an urgency to buy now. You're not going to miss your only chance.

  • Jesse

    so if I'm looking at the chart on BWLD, it's at the top of the channel. Looks like you could get in around $44 at least on a pullback.