January 13th, 2012

Cement, Concrete and Aggregate Group: EXP

As subscribers know, my searches for suitable stocks to buy follow a strict process: evaluate the market through the guidance provided by the proprietary Market Momentum Meter, drill down to find the Industry Groups and, finally, zero in on those stocks with the best chart patterns.

I can’t tell you the Meter’s specific reading because that’s available exclusively to members but I can share with you that there appears to a glimmer of hope, a prospect of a slightly more positive tone after nearly a year of frustrating horizontal action.  So it’s appropriate to begin looking for some of the most promising Industry Groups.

I use IBD’s Industry Groups rankings three ways:

  1. The top ranked Industry Groups are those with the stocks currently showing the best relative strength performance.
  2. The Industry Groups that have advanced the most over the past four months (granted, an arbitrary time horizon) to offer a preview of which might soon become the top performers in the near future.
  3. The Industry Groups that have advanced the most above the 20-week moving average of their ranks.

The Industry Group ranked highest by IBD last Friday were 9 stocks comprising the Cement, Concrete and Aggregate Industry Group.  Another fact that makes this group so enticing is that, as the graph below depicts, Friday’s highest rank put it 112 places higher than its 20 week moving average …. the greatest span of any of the 197 Groups.  Plus, its rise in rank over the past 4 months was greater than any other Group.  In short, this Industry Group performed better than any other when measured by these three conditions:

One typical stock in the Group is EXP (Eagle Materials), a manufacturer and distributor of gypsum wallboard and cement in northern Nevada, California, the greater Chicago area, the Rocky Mountain region and Texas:

If I were a fundamental investor, I could probably come up with any number of stories, rationales and explanations for why stocks in the group should be bought.  Could it be because infrastructure spending will finally be evidenced?  Is it because the construction drought might finally be ending?  But I’m actually a Stock Chartist who looks at the pattern of price movements and sees that for the past four years, this stock as well as several others in the Group, has been stuck for the past four years. Whether one sees a double bottom or a horizontal trading range, it’s clear that the stock is now bumping up against a resistance trendline (or you may call it a “neckline”).

After such an outstanding climb, the odds are in favor of some profit taking now.  But this is a stock and industry group that probably should be watched and bought on the dips (unless the market surprise us by losing the little momentum it’s trying to build by turning and collapsing …. then all bets are off).

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January 4th, 2012

Preliminary Positive Signs on Banks and Financials

A market timing strategy sometimes recommended by professionals like Fidelity Investments assumes that the various phases of the stock market’s life cycle correspond roughly to the stages of an economic business cycle.  To aide investors following the strategy, they developed the following schematic which overlays a typical economic cycle, the market life cycle phases corresponding to the various economic sectors and the industry groups that typically tend to perform best in them.

In the Financial Crises Crash, financial stocks was one of the first (after homebuilders) and most beaten down of all the Industry Groups having come under new, intense Federal scrutiny, regulation and restructuring and, up to now, the stocks have been slow to recover.  But their time may be coming.  The XLF (Financials ETF) appears to be struggling to form a small reversal bottom with a neckline at 14.00 which if crossed could carry the stock to the next resistance at 17.00:

The XLF is comprised mostly of the larger-cap, money center banks and insurance companies (click here for the current list of top holdings).  The ETF of smaller regional bank stocks, RKH, looks similar and the the various IBD regional bank groups are continually advancing in their ranking among the 197 Industry Groups.  Two examples of groups moving higher and above their 20-week moving average are the Midwest and Southwest banks:

If these aren’t apparitions but inklings that the financials are actually beginning a recovery reversal then the market may also finally begin to break out of it’s long trading range, emerge from its funk and begin an assault somewhere down the road on it’s all-time time high.

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December 28th, 2011

Big Pharma: Industry Group with Upside Potential

While market direction and momentum trumps everything else, the Industry Group in which a stock belongs ranks second in importance.  A subscriber to Instant Alerts last week brought to my attention a stock that, on further research is in an Industry Group that is worthy of taking a nibble into if the market will be able to sustain some sort of upward bias as we enter the New Year.

“Big Pharma” stocks, or the larger stocks in the Ethical Drug Industry Group, all seem to be forming nice size, well formed (so far) bases which could, with a good tailwind, be among the leaders in next year’s market.  The Group has consistently ranked among highest among IBD’s 197 Industry Groups: Among the largest firms in the group whose charts show the early makings of nice bottom reversal patterns (a few have already broken above the top boundaries) include (click on images to enlarge):

  • BMY (Bristol Myers): crossed above a nearly 10-year long resistance trendline
  • LLY (Eli Lilly): crossed above upper boundary of an ascending triangle but is now facing a nearly 10-year descending resistance trendline which it failed to cross over in 2007 and may fail again next year.
  • GSK (GlaxoSmithKline): Let’s not split hairs. Was it an ascending or symmetrical triangle or was it an ascending wedge? It doesn’t really matter that much since stock is clearly trudging higher.
  • PFE (Pfizer): Same as GSK, ascending triangle or wedge? Same as LLY, facing a long descending resistance trendline.
  • NVS (Novartis): An nice inverted head-and-shoulders which, since it’s not at the bottom of a trend but at the top might be called, in IBD parlance, a cup-and-handle.

Others with patterns that are not as fully developed and still in progress include:

  • SNY (Sanofi-Aventis): an ascending triangle
  • AZN (AstraZenica): a 10-year horizontal trendline that needs to be crossed.

A lot to digest but, with a more cooperative market, some potentially good fruit to pick from.  Note: all of these stocks pay dividend with yields currently 3.6% up to 4.8% for GSK.  They are about the only stocks among the 45+ in the group that do pay dividends.

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