How to Assess the Strength of a Sector

Developing the knack for picking the right stocks to place trades is a difficult task to say the least. Even if you pick the best company, if your timing stinks, you still won’t do well. To enhance your timing, it’s vitally important to get a sense of how the general market is doing. More importantly, traders need to take a look at the performance of each stock’s respective sector. Here are a few tips on how to get a sense of the market’s strength as well as the strength of a particular market sector.



First, let’s look at the broad general market. Besides the obvious—watching the Dow, S&P, and Nasdaq indices—how can you really tell which way the trend is likely to trade in the not-so-distant future? One easy but slightly time consuming method is to plot the relative strength of all thirty stocks in the Dow ($INDU), the Nasdaq 100 ($NDX), and The S&P 100 ($OEX). Although it can be helpful to do this on a monthly basis, if you’re trading options at least 3 months out, quarterly is probably more than sufficient.



There are countless web sites that will give you the breakdown of companies in these respective indices and the percentage of the whole that each occupies. You can check out the Relative Strength (RS) rank of all the companies you are interested simply by picking up a copy of Investor’s Business Daily. Relative strength measures a stock’s 52-week price change against all other publicly traded companies. It is ranked on a 1 to 99 scale. If the RS of a particular stock is 93, it has outperformed 93% of all other companies over the past 52 weeks in terms of price movement. If you put these companies and their RS ranks in an Excel spreadsheet, you can watch the true RS of the entire index as it rises and falls. While you don’t need to follow all three indices, we recommend following the Nasdaq 100 and either the Dow or S&P 100. This will give you a better representation of the broad general market. You’ll not only notice subtle, but meaningful trends in the broader indices, but in the individual stocks themselves. You’ll be able to see which companies are gaining strength and which are losing momentum.



To gauge the markets’ leading sectors, you can review the Industry group rank in Investor’s Business Daily and plot them alongside your RS ranks. They are graded from A to E. An "A" means that a certain sector is in the top 20%; and "E" means it is in the bottom 20%. Often, you’ll see changes in sectors before the best stocks in that group make their biggest gains. If you see a rising sector rank and rising RS on a select few stocks within it, this should grab your attention and warrant further research!



Another way to get this information is by going to your local library and reviewing the most recent copy of The Value Line Investment Survey. In it, you’ll find a page titled "Timely Stocks in Timely Industries." This page lists stocks with a rank of 1 or 2 (on a scale of 1 to 5) that Value Line’s analysts believe will outperform in the coming 6 to 12 months. Value Line’s record is extraordinary. According to their published materials, they’ve beaten the NYSE Composite ($NYA) by a 13 to 1 margin over the past 30-plus years.



For more information please visit : http://www.safetyinthemarket.com.au/