Though all stocks have been headed higher (despite) the odds over the last couple of weeks, many sectors are just topping off what’s been a multi-month rally. Since those trends are likely to be near their end, we still want to look for industries that appear to just now be starting a nice, long-term move. We think we’ve found some charts along those lines; the underlying stocks that make up these indices are worth a closer look.

Telecom

If the sector rings a bell, it’s because we went bullish on these stocks back in our December 7th sector relative strength analysis. Since then, the chart has taken on another bullish shape – this group held above the prior resistance line, and pushed higher this week. There’s still lots of room to recover though (and that’s the key).

Wireless

Drilling down into telecom, we can identify wireless stocks as the best rebound bets.

Specialized Finance

It can be a little tough to pinpoint a stock that actually qualifies as a ’specialized finance’ name… the ’specialized’ is a matter of opinion. It may be worth the effort though, as this group is starting to appear as an emerging leader in more and more places.

Semiconductor Equipment

The semiconductor equipment maker stocks continued to make higher highs last week after a long string of higher lows (and found support at what used to be resistance). Note this strength is specific to semiconductor equipment stocks – not the semiconductor makers themselves.

Forest Products

This is mostly the paper and packaging stocks, but wood products are in there too. Either way, the group is making higher highs after a terrible 2007 and 2008.

Your Questions Answered

Q. My main question about trading is how to determine which sectors to buy. Do you choose ones that have already performed or the ones that have been ignored and are possibly going to get new interest from the institutions (a contrarian outlook)? Thanks – I am looking forward to your newsletter.

A. Thanks for the question. As you might have guessed, today’s charts and your question were not coincidental.

The answer is…. mostly mechanical. Fundamentals matter when it comes to assigning a value, but when you take a step back and look at a sector’s or industry’s value, the picture gets a little more blurry. So, we use a couple of mechanical or systematic tools to find the ‘next hot thing’.

One of the techniques was what you just read above – a visual scan of all the major industry charts as part of a search for industries that are starting to come up and off lows (as opposed to reaching new highs). This way we can find trends at their beginning rather than at their end. Yes, it’s work, but it’s worth it.

Another tool we use is rankings among different timeframes. We’re far more interested n buying the biggest twelve-month losers than twelve-month winners…. especially if those twelve-month losers are also one, three, and six month winners (or are at least making progress to that end). This requires a giant spreadsheet and a lot of work, but again it’s worth it.

The third technique we use is a visual comparison of sectors that eventually leads into a ‘drill down’ analysis. We went through such an example back on December 10th.