I deliberately opened a can of worms this morning to establish the need and use of today’s ‘chart of the day’….. a chart you can plan on seeing on a fairly regular basis.

Per this morning’s portfolio snapshot and update, I hope its clear that the right sector, style, and market cap allocation is a major part of our stock-picking strategy. What I didn’t mention then that I’ll explain now is how I find the hot groups, and steer clear of the colder ones. In a nutshell, I do it visually.

The percentage-change chart below looks at the results of all the major groups going back to the March bottom. Obviously some arenas did better than others. What’s not as obvious (though I’ve observed this time and time again) is that the discernible disparities on these charts tend to last for a while. In other words, the leaders lead for months, and the losers lag for months. All of them are always in flux, but this simple chart lets me know what’s heating up or cooling off with just a glance. Take a look, but then keep reading for some specific thoughts.

Style and Market Cap Performance - 10/20/09

The initial reaction might just be to favor micro caps, and avoid large cap growth. That’s actually not a bad interpretation, but what you can’t quite tell on the chart (but I can with my zoomed-in version) is that large-cap growth is starting to catch up with the other style/cap indices. Likewise, large cap value is starting to drag.

So that covers style and cap, but what about sectors? That was the chart you saw back on the 15th. I could overlay sectors onto the chart as well, but then it would be a big mess…. too difficult to read. In breaking them out like this, I have a very clear idea of what’s strong or weak.