Replies to post #9913 on Sector Investing

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Lets stick just with the sector spiders for now.

Can we agree that we are in a mature bull market?

The SOX and transports are not doing as well because no matter how much QE Whatever is thrown at the market we are far closer to a market top than a bottom.

You need to increase your time frames in order to get a clearer picture of what might (MIGHT) do better now long or short.

RtS

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Let go back to the Business Cycle and look at how various sectors are doing now to help determine where they might trade from here.

Ask yourself is the market either overbought or oversold?

Is the trend up or down?

What sectors are leading the market now? Which ones recently made new highs? Which ones did not?

What is current sentiment in the market like? Is it either too bullish as is often seen at market tops or too bearish as is always seen at long term major market bottoms?

What's the volume like? Volume is almost always huge at major market tops. It grows even more on the way down while volume and interest in owning stocks virtually dries up at market bottoms.

Business Cycle & Stock Performance

Because sector funds have a narrow focus, you should be familiar with the factors that may affect the industry in question.

http://personal.fidelity.com/products/funds/content/sector/cycle.shtml

Based on a comprehensive analysis of the relevant facts, you may arrive at a judgment as to what the industry's performance will be like going forward. One technique commonly used by is to monitor the business cycle for clues as to what may be happening in the market.

Business Cycle Basics

By examining empirical evidence, the investor can attempt to create a framework for viewing present and future events as they unfold. There are two key questions the investor may want to ask:

1. Will the historic pattern hold, or will it be altered? To answer that, you'll need to ascertain whether the factors driving today's market are fundamentally unchanged, or whether the situation has evolved incrementally or even been radically changed.

2. Has the market already taken the anticipated future events into account? If the factors driving the industry are the traditional cyclical ones, the market usually will have taken them into account, because they are expected. If the factors represent a new element in the equation, then the market may not be expecting them and may not have adjusted accordingly.

Business Cycle and Relative Stock Performance

The following chart shows a typical business cycle and the points at which various economic sectors tend to outperform the broader market. Click any number in the chart to learn about the cyclical characteristics of a particular industry.



The chart above shows a typical business cycle and the points at which various economic sectors tend to outperform the broader market. Please note that the chart should be used for illustrative purposes only. The chart is a historical representation of stock performance movements relative to the business cycle and is not intended to convey any current or future economic outlook. Choose a Sector for a detail description of its role in the business cycle.
Source: 2000, Standard and Poor's, a division of McGraw-Hill Companies, based on a study analyzing the differences in market returns of 90 Industries vs the S&P 500 during 10 complete economic cycles from December 1945 - December 1995.

Consumer Non-Cyclicals
Stocks in consumer non-cyclicals (food) and consumer growth industries (cosmetics, tobacco, beverages) tend to experience fairly steady demand and are less sensitive to changes in the business cycle. These stocks typically attract investors when the economic cycle or bull market has matured, or is in the early stages of contraction.

I will use the BP Indices and some of the older Amex Industry Holder ETF's to show these relationships. RtS




Consumer Cyclicals (durable & non-durable)
Stocks in this category include durables and non-durables that are sensitive to interest rates as well as the business cycle. Investors typically seek them out when the economy is in the late stages of contraction.




Healthcare
In general, stocks in this sector move similarly to consumer non-cyclicals. This sector is considered defensive, meaning companies in this sector are generally unaffected by economic fluctuations. The healthcare industry consists of pharmaceutical firms, HMOs, biotechnology firms and medical equipment suppliers. Pharmaceutical companies are affected by competitive market shares, the pace of FDA approvals, patent lives, and the strength of the R&D pipelines. Many biotechnology firms are still in the development stage with their fortunes largely determined by investor perceptions of the relative merits of their R&D pipelines. With future new financing likely to be more difficult to obtain than in the past, strategic alliances between major drug companies and biotech firms are expected to increase.




Financials
Stocks in housing-related industries tend to respond well to falling interest rates and are often targeted by investors in the mid to late stages of an economic contraction. Non-mortgage-dependent banks are generally driven by commercial and consumer loan growth, and tend to be favored by investors during the middle of the cycle.





Technology
Technology stocks can be cyclical to the degree that they depend on capital spending and business or consumer demand. However, they may also have long-term growth potential as technological products find broader applications and as new technologies are developed. Technology stocks are usually popular during early to mid stages of an economic expansion.








Basic Industry
Profits of basic industries are driven by high utilization of capacity and strong market demand for products. Therefore, their stocks tend to be popular with investors late in an economic expansion. For basic material companies, the global economic picture and supply/demand equation also affect stock price movements.




Capital Goods
Capital spending tends to increase midway through the business cycle, as the economy is heating up and higher demand for products leads companies to expand their production capacity. Demand in global export markets is key for agricultural equipment, industrial machinery, and machine tools.






Transportation
Railroads and other surface carriers tend to react early to a pickup in the economy. Airlines are subject to cyclical fuel costs, usage versus capacity, and competitive pressures on airfares.




Energy
This category includes large integrated international companies, domestic exploration companies, and energy services companies. Each industry has its own dynamics, but ultimately all are driven by the supply and demand picture for energy worldwide. Political events have historically had a major impact on these industries. Stocks tend to be popular with investors late in the business cycle.





Utilities
Electric companies have historically been very sensitive to interest rates because of the large debt financing costs they must incur in order to build their infrastructures. These stocks tend to perform well in an environment of declining interest rates. Telephone companies may offer attractive long-term growth opportunities, as they diversify and compete in recently deregulated telecommunications markets.




Precious Metals
Precious metals and the stocks of companies that mine and process them can be affected by industrial and consumer demand, but the largest factor contributing to volatility in this category is generally inflationary pressure. Investors often flock to this category late in the expansion cycle.

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So the next question is can the Russel 2000 actually be outperforming in the later stages of a bull run? If so is it better to question that outperformance or climb on the train?

It does not matter to me if we are talking about an individual stock, sector, ETF, or major market index we have to give the greatest weighting to longer term charts.

Is the Russell 2000 actually outperforming? Or should I say was it? Look carefully here at this chart and you will see that the S&P 500 has continued its outperformance. Check out the yellow line on the six month chart:



Market rallies are broadest and strongest when they are led by small caps. This chart calls into question just how strong the rally was the last six weeks:



But lets get to the longer term charts. Note the possible double top on the Russell 2000 at 868.50. No new high on the Russell 2000 at all:



The monthly chart shows the same potential double top:



Of course the FED certainly is making every attempt to add fuel to whatever recovery is now currently underway.

RtS

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I don't know anything about the TNA except what I see on the charts. It hit its high back in 2011.



It's a bullish trading vehicle that is supposed to give you 3 times the bang for the buck on a daily basis. Swing trading a 3 times long or short trading vehicle loses its attraction for me in any period longer than a single day.

In fact I would not touch it at all. It is useful looking back on it though as it does illustrate on a longer term chart that not all is well in small cap land. That does not mean you can't make money trading it. I would just stick to a day trade.

RtS

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How I determine what to trade is simple. What do I know? Do I know a stock, industry, sector or ETF well enough to help me make money off trading it either long or short.

If not and I want to explore the possibilities then I am going to do everything I have said in the last few posts about determining where we are in an economic cycle, checking the charts both daily, weekly and monthly and also explore the fundamentals.

Since we don't have a specific sector picked out to go long or short at this point we will just leave the fundamental issues alone for now.

In the next few posts lets look at the sector spiders on six month, weekly and monthly charts and see what actually looks strongest and weakest now.

RtS

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Six Month Charts of the Sector Spiders and the IYT. If I was trading one of these the way I trade I would be looking for overbought situations to short and oversold one to buy. I would prefer to buy the sector that swings the greatest percentages. Not necessarily the strongest or weakest sector at all. I look at swing trades that run counter the overall trend when I think the sector is about to top or bottom. In between trade the trend which is easier to see on longer term charts: