Current Industry Strength and Weakness

Nov 6, 2007: 12:11 PM CST

Traders can often find ‘sleeper stocks’ that offer great potential for profit by running sector and industry scans and determining which industries have been showing greater relative strength or weakness over a specific period.

The following results are from a three-month industry group scan from Prophet.net (the graph dates are read right to left in terms of money flow/strength):

Strangely perhaps, Regional Banks have been showing the largest gains/relative strength over the past three months, with three weeks in a row at the top spot.

Major airlines and Independent Oil and Gas have shown high relative strength as well, and these industries are significant because of the number of stocks within those groups (111 stocks in Regional Banks and 92 in Oil & Gas).

Potential opportunities may still be available in the following Regional Bank Stocks: CBH and STT. Personally, I would avoid this industry.

Money has been consistently flowing into the Internet Information Providers group with 38 stocks, as we have seen relative strength readings of 44 in August to 98 currently. There are probably some choice opportunities as this group continues to take the lead. You often find better opportunities in groups that exhibit this pattern of flow, rather than those that have been at the top for multiple months.

Opportunities for long trades may be found in the following stocks that are currently in uptrends: APA, APC, CHK, CNQ, DNR, DVN, EAC, EOG, and ECA.

Relative strength is based on the concept that “What is strong, gets stronger.”

The opposite of relative strength is relative weakness. Let’s see the chart of the worst performing industries over the last three volatile months:

It probably should come as no surprise that the worst performing industries include Home Improvement, Mortgage Investment, Building Materials, Residential Construction, and Heavy Construction.

The housing market has been the focus of the media for months in terms of the ‘credit crisis’ and sub-prime ‘meltdown’ or whatever buzz-word is in vogue at the moment. The point is that these industries have seen the largest money flows out of them, and have exhibited the weakest relative strength ratios over the last few months.

Again, the best opportunities (to ‘go short’ or hedge) are often when we see a right to left pattern of green to yellow to red, which none of these industries are showing neatly.

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