Finding the best and worst industry groups

The post reveals the best and worst performing industry groups and how to find them. Commentary is provided on how to use the information for stock selection.

Stocking the Pond; Finding the best and Worst performing industry groups

My process generally revolves around buying strength and selling weakness. I find it helpful to know what the best and worst performing groups are to begin my search for individual names or ETFs that capture the space.

Stocks are grouped by type and industry in “industry groups”. There are about 140 different industry groups. The adage “birds of a feather flock together” is generally true when it comes to stocks. While there is always an outlier here and there, if you can find an industry group that is performing well, you’ll usually find stocks within that group performing well.

I have catalogued all of these industry groups into a chart list. I created a second list that charts each industry group’s relative performance compared to $SPX.  By looking at the relative performance over 30 days, we can see groups “emerge” and begin to outperform the indexes. We can also do the reverse and look for under performing groups.  Once we have the best and worst performing groups, we can drill down and look for long or short set ups.

The top 10 performing industry groups relative to the $SPX ( 30 day look )

Ranked #1 to #10

$DJUSFH – Home Furnishings

$DJUSHP – Health Care Providers

$DJUSTR – Tires

$DJUSCR – Computer Hardware

$DJUSRP – Recreational Products

$DJUSTB – Tobacco

$DJUSDS – Industrial Suppliers

$DJUSMF – Mortgage Finance

$DJUSAU – Autos

$DJUSTQ – Tech hardware

Sample Relative performance Chart – Furnishings

From the graph we see a long period of under performance followed by a period of base-building. Now, relative performance is emerging and breaking out.  This is a perfect time to look at the individual stocks in the group for long set ups.

 

The bottom 10 performing industry groups relative to the $SPX ( 30 day look )

Ranked  worst to less bad

$DJUSCL – Coal

$DJUSEH – A REIT Group

$DJUSRU – Restaurants

$DJUSCM – Personal Products

$DJUSDB – Brewers

$DJUSIF – Full line insurance

$DJUSVN – Vinters

$DJUSPL – Pipelines

$DJUSIP – Property and Casualty Insurance

$DJUSOQ – Oil Equipment and Services

Sample Relative performance Chart – Restaurants

From McDonald’s to Starbucks, money has been coming out of this sector. When a group rolls over you often see it in the vast majority of stocks in the group. You can see from the relative performance graph, the group was outperforming the $SPX for over a year but from about  3 months ago, money and performance are coming out.  I recently posted a bunch of trade ideas on Restaurants HERE  

 

Industry Group Relative Rotation

I dropped the industry groups cited above into a relative rotation graph so you can see the 30 day path of each group and the relative quadrant each is in.  Here are the results.

Aside from coal ( $DJUSCL ) which is a perpetual loser in the lagging quadrant, we can visually see the path of groups rotating in a clockwise fashion from leading, to weakening, to lagging, to improving. Selecting groups that are improving or leading are obviously the best places to look for emerging out performance.

Pulling it all together

Sifting through the hundreds and hundreds of stocks out there for trading opportunities can be a daunting task. Having a process to whittle down the universe of possibilities to a manageable number is really helpful, even just to tell you where not to look.

The idea that individual names within the industry group tend to move together is also key. If you stock the barrel with outperforming fish, its easier to shoot winners.

By identifying groups that are under performing, you will find fertile shorting opportunities.  Even if you’re not into shorting, you’ll know where not to go long, which is a good thing.

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Notes:

The charts are and levels are provided as well-informed guidelines. That said, please be aware that exogenous events like surprise tariffs or other events can easily move price through support / resistance zones.

Also, set you stops according to your own risk tolerance. The ones I have provided are to be used only as a guide. The most important aspect of your stop is to honor them. Some trades work, some don’t. Honoring your stop will ensure your loss on a failed trade will be minimal.

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