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Sector
Rotation: Healthcare Heating Up, Materials Cooling Off |
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Looking
for the next big wave to trade? Financials and basic materials have
been the big winners since the March 9th low, gaining 81% and 54%, respectively.
Those are so last month though.... hopefully you aren't trying to
relive the past by jumping on those fading trends.
We've got some
data for you today that could help you find the next big wave of
not just bullish trends, but also bearish trends.
Yes,
as you've already read, healthcare is likely to be one of the better areas
over the next few weeks. And yes, basic materials are cooling off.
That's only the beginning though. The big profits in the investing game
come by understanding the details.
Sometimes we
have to use words to make a point. Other times though, a picture
helps
to tell the story so much more effectively. We've got a few of those pictures
today.
Basically, as
the first leg of what we hope is a new bull market starts to wind
down, we expect to see yesterday's leaders uprooted by yesterday's laggards.
That's
just the way stocks work - sectors fall in and out of favor.
 As
you can see on the nearby chart (which compares percentage changes of
various sectors), investors really favored financial stocks,
materials, industrials, and technology - in that order - over the
last eight weeks.
Take a look
at what happened to technology stocks this week....it was the
only losing sector. Things can change that fast; we have to
wonder if the market's other recent favorites have the same in store for
them.
Now take a look
at the groups that are at the bottom of the pile for the same time frame.
If it looks like they're starting to accelerate (slope higher), you're
not crazy.... they are!
The former
leaders starting to peak? The former laggards starting to rally? Yep.
While there's
nobody
who'd love to see the financial stocks continue to make their recovery
rally more than us, we also know from experience the market is fickle...
in addition to being easily bored. Now with the government's bank
stress tests in the past, there's no real excitement or anxiety in owning
financial stocks. The market is apt to go shopping for something new.
Besides, what's
been off the media's radar for a while they could jump on now? Healthcare,
utilities, energy, and consumer goods ....which also happen to be the
four groups at the bottom of the barrel, though each is warming
up.
If you think
their new acceleration is strong now, wait until the media starts
to chatter about these stocks in the near future.
The point is,
traders searching for the hot spots should be looking for the emerging
trends rather than the prior ones. The financial and basic materials
ships have already sailed. Tech stocks may already be good shorting or
bearish candidates. Based on this simple chart, we think the former
laggards like healthcare and energy are apt give you bigger gains in short
periods of time over the next few weeks.
That's only
about half the story though.
If being in
the right sector is good, then being in the right industry is great.
 Why?
Because even within a sector, some industries do far better than others.
If you can pinpoint the leaders, you're more likely to find the market's
hottest stocks.
We can't go
through this 'drill down' exercise for every sector we've discussed today,
but we can do so for a couple of them.
The nearby chart
breaks down the healthcare sector into its key components... pharmaceuticals,
biotech, equipment, and providers.
It takes less
than a second to realize some key things.... healthcare facilities (hospitals)
are likely to be overbought, andbiotech is still plagued. However, equipment
makers and pharmaceutical stocks are your best bets in group - both
appear to just be brewing a new pot of momentum.
Now let's take
a look inside the energy sector to see if we can find what's really
going to be its big growth driver.
 We've
got five basic industries to review... drilling, equipment and services,
exploration, refining, and transportation.
Unlike the healthcare
chart, it's not crystal clear which groups are overbought or undervalued
- they've all done pretty well. That's valuable information all
the same though, since you'll at least not have to wonder if you've
managed to pick the one laggard in the whole sector. That said, it looks
like the refiners are perking up, and the drillers are getting tired. Both
are modest nuances though.
Of course, you
also have to factor in how these stocks tend to ebb and flow with the price
of oil. As long as oil continues to creep higher, however, energy stocks
are going to sustain their relative trends.
And that's
the key point here - it's all relative.
Picking a rising
stock or shorting a falling stock is great, but there's an opportunity
cost if you're not buying the best stocks or shorting the worst
stocks.
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Final
Thoughts |
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What about
fundamentals? Yes, we like those too, since it's earnings and growth
that will ultimately determine the longevity of any trends. However...
When's the
last time a stock actually traded at what it's worth? For that matter
(and as we're forced to ask in the shadow of all these 'one-time' accounting
charges), how does one truly know what a stock is supposed to be worth?
Like technical
analysis, fundamental analysis is nothing more than an odds-making tool.
There's nothing wrong with that, but we all have to understand it's not
a guaranteed path to profits. As we've said before, we combine the two
to optimize our results.
The upside
to today's analysis is that it shows us what certain stocks are
doing, rather than what they should theoretically be doing.
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
