Thursday, July 7, 2016

Sector Analysis to Identify Stock Trading Opportunity

From the office of Superior Profit and Sagar Nandi.

Since more than one year, S&P 500 has hardly moved. However, individual Stocks may be moving up and down significantly within the same period.

Sometimes large players may come out of one Sector (book profit) and enter new position in a then poor performing Sector. Such Sector Rotation, if identified timely may lead one to anticipate a Stock move and enter a position at the right time (or book profit just as the Sector of a Stock is starting to go out of favor).

One way to anticipate movement of a Stock or a group of Stocks is to look at broad Sectors. And rank the Sector's performance on a regular basis to see how and when a sector is changing from an under performer to out performer.

Where to find such Sector Analysis and Ranking?

Superior Profit Investors rely on the simple and robust Sector Analysis presented regularly on Superior Profit Home Page. This is based on the most reliable data - Thomson Reuters data. Which is available through Metastock Real Time / Xenith.

As Sector is a Stepping Back view of the Market relative to looking at Stocks, it tend to me more useful to look at Sector Analysis on a Weekly basis instead of looking at it Daily. This is the same concept that Superior Profit investors use for Broad Market Internal Analysis. Such Broad Market Analysis is also posted in the Superior Profit Home Page on a Weekly basis.

What information may we gather from Sector Analysis today?  For that, let us look at the latest Sector Analysis and Ranking as presented in the Superior Profit Home Page as of 2nd July 2016. First, we will look at the Sector Charts.
We have plotted the ten major Thomson Reuters Sectors in the chart above as of 2nd July 2016 looking back one year.

We can readily see that Utility is the top performer (the top line in the line chart) - gaining by 20% in last one year. And Energy is the worst performer. Declining by 12% in last one year. ​However, since around Feb, 2016, all the Sectors have gained. Including Energy.

What actionable information may a Superior Profit Investor gather from this chart? Several.

For example, one conclusion is that Bottom Catching opportunity for Long Term Investment in Utility Sector has passed long time ago. All major Utility Stocks may be already at Pendulum High in CUE Charts. This is not the optimal bottom catching time for a stock.

For Energy, the Bottom Catching Opportunity had passed in February, 2016. And indeed Superior Profit Investors had traded Energy related instruments between Feb and now. Energy is still rising and there may be good opportunities there - to buy Stocks at relatively low price while they are starting to go up.

Also, if Utility reverses (it has not done so yet - more on this later in the Ranking table) - there may be an optimal point to book profit in any Open Position in Utility Stocks. And probably an Opportunity to Short those Stocks as well.

The chart above is useful to show the trend of the Sectors - however, it is not the easiest tool to choose a Sector for possible investment. Ranking table is an easier way.

Let us look at the Sector Ranking Table as of 2nd July (also from Superior Profit Home Page).
We have two tables here. One is the bottom table - Percentage Performance Table for last 1 Year, 6 Months, 3 Months, 1 Month and 5 Days (i.e. one Week).

How to use it? If a Sector is continuously out performing  for long time (like the Utility Sector - which is in last row in the table), we may look for when it is starting to under perform. And book profit at that time in existing Utility positions - or at least tighten Stop to protect profit (Superior Profit Investors use Protection signal in CUE Charts to do the same).

The Ranking Table on the top makes this task even easier. Rank 1 means best performer. Rank 10 means worst performer. Among the ten Sectors under consideration.

We can see from Ranking Table that for all the time periods, Utility is in Rank 1 or Rank 2. This shows that Utility had been strong and is still strong. If Utility was to fall back and its (say) Monthly Rank / Weekly Rank started to become worse, that is the time to close Utility Stocks (or to tighten Stop).

Most of the other Sectors are up - down. For example, Financials are down about 8% in last 1 Year and down about 3.6% in last 6 months. However, it is also up about 2.8% in last one week. Financials does not look strong as of this time. The Ranking Table makes the scenario clearer. Financials have been in Ranks 7 to 10 for all the periods under consideration. Clearly struggling to go up.

What about Energy? As we saw from the Sector chart earlier, it is the worst performer for last one year. However, Ranking table provides clearer and actionable information. It shows that for last 6 Months, 3 Months and 1 Month periods, Energy ranking had been top level - 1 or 2. That was the precise time to catch Bottom on Energy Stocks and Commodities.

What about now? Is there any stocks that we can try to drill down from the Sector Analysis?

Let us look at Healthcare Sector which includes Pharmaceuticals.
Healthcare is down about 5% in last 1 Year. And down only 0.5% in last 6 Months. However, since then, for last 3 Months,  1 Month and 1 Week, Healthcare has gained by 5.1%, 0.8% and 4% respectively. 

Ranking Table provides even easier to read information. For last 6 Moths Healthcare ranking was 8 out of 10. Pretty poor performance among the Sectors. However, since then, in last 3 Months, 1 Month and 1 Week, Healthcare ranking has been 3, 4 and 1 respectively.

Yes. In last 1 Week (as of 2nd July), Healthcare became Top Performer.

Superior Profit Investor would look for Bottom Fishing opportunities in Stocks at that time. Was there such opportunity? Yes. Indeed.

In the last four hours long marathon class on CUE Trading System that was conducted on 28th June, Amicus Therapeutics (FOLD.O) was identified to have a Headwind Long Swing Trade opportunity. This post in Superior Profit Traders Community explains that trade on FOLD.O. As can be seen, the Superior Profit Swing Traders would have already booked profit in that trade - at least partially. And put a Breakeven Stop on remaining position. To ensure it is almost a Risk Free Trade. In case you are interested, you may watch the video recording of the marathon session and other videos in the Superior Profit Education Center - Video page here. The marathon session videos are under the heading "Summary of All Key Aspects of Superior Profit Trading using CUE System".

Any other opportunity was there? Of course. And below chart (using Hop On Advanced Template of CUE Charts) of Celgene (CELG.O) explains the easy and quite profitable Long trade in Celgene.
Celgene is down about 12% in last one year (as of this post date that is after 6th July Close) whereas S&P500 Index was up about 1.5% in same period.

Celgene was under performing broad market. Healthcare Sector was starting to move up the rank.

And at same time using CUE Charts Superior Profit Investors could easily take a Long Trade as shown in the chart above - Long Trade using Exhaustion at Double Bottom and Fake Down Side Breakout plus Headwind Signal. The trade could be identified in minutes using CUE Sonar (Explorer in Metastock) on 28th June. The same day FOLD.O was identified in the marathon CUE Charts training session.
What about today - just before Market Open on 7th July as I am writing the post? You may look at Valeant (VRX). Below is the At A Glance view of Valeant.
VRX is down by a whopping 89% in last one year. That is the stock is at rock bottom.

VRX had its fair share of issues as the stock declined that much.  It may still a large player in the Pharma group of stocks.

There is inherent risk in such stocks. However, if one could catch such bottom and quickly book partial profit and leave the rest at Breakeven and then Trailing Stop, one might get a substantially profitable trade. The other positive is that if VRX drops from here, Stop would be narrow. Allowing one to exit the trade and cutting loss quickly.
The Valeant chart was also shared in Superior Profit Traders Community Forum for USA Market. And the latest posts are automatically reflected in Superior Profit Home Page.

Whatever is your decision on VRX, Long or Stand Aside (probably it is not at all advisable to Short the stock now as it is already so low - chance of Short was long long ago that could be easily captured using CUE Charts), the above analysis shows how Looking at Sector Performance Charts and Ranking helps a Superior Profit Investor to capture and even anticipate profitable Swing Trades and Long Term Investments.

You may like to bookmark the Superior Profit Home Page for such useful and actionable Sector Performance / Ranking as well as potential trade ideas as posted in Superior Profit Traders Community.

Sagar
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