1.28.13 – One Thing Leads To Another

Consolidation = Going no where fast?  That’s one way to look at today’s action.  After the tremendous run this month it’s no small surprise that Mr. Market is taking a breather.  The Dow Industrials put in a reversal today, slipping 14 points to close at 13,881.93.  The S&P 500 Index also slipped, falling .18%, while the Nasdaq Composite gained back some last ground by rising .15%.  Silver prices were weak but oil gained ground.  Treasury yields continue to rise as prices fall.

KOLD, the leveraged short natural gas ETF, skyrocketed up 9.81% on almost double average daily volume. VNM, the Vietnam ETF, was up again, this time rising 3.22%.  Please click on the symbols for details.

Over the almost 3 1/2 years I’ve been writing this blog, I have illustrated many different ways to find which ETF’s are rotating into favor.  Watching a video from my good friend Ron Brown  reminded me of a technique I use on a regular basis.  Ron is a Master when it comes to the use of High Growth Stock Investor software; I’ve seen the man make HGSI stand up and beg for buttermilk!  His technique is simple to use with HGSI and very effective.

Ron starts by ranking all stocks by their “Raw Combo.”  This is a system that computes weighted values for each data field selected by the user and then combines all the weighted values.  Combo ranking can be displayed using the 1-99 ranking system popularized by William O’Neil of Daily Graphs fame, or the raw value can be displayed.  I prefer to use the raw combo because it shows use the actual value.

The data fields Ron selected locates top stocks to trade based on both technical and fundamental factors.  Stocks have strong earnings and revenue growth over the past year, strong relative strength, group rank, accumulation, ROE, etc.:


Applying this combo the the list of All Securities ranks 7,800 stocks in 1 – 2 seconds.  I then create a group of the 100 stocks with the highest combo ranks, using data available through last Friday:


There’s a lot of data here and it can be confusing to the untrained eye so let me focus just on the combo rank and last close (1-25-13) data fields:


I repeat this process every day after downloading yesterday’s data so I have a file of the Top 100 stocks each day I can refer back to.  The next step is where the fun begins.  Every stock has a description that lists what industry group it’s in.  Other descriptors include SIC code, sector, and brief description of the company.  Here is how it appears it HGSI:


Within this Top 100 group, the best performing stocks on January 25, 2013 appear.  If an entire industry group is strong, multiple stocks within the group will appear in the Top 100 list.  Ron and his colleague Ian Woodward refer to this as a “Wolfpack” and the description is apropos.

The next step is to list the Top 100 stocks by their respective industry group.  Since a picture is worth one thousand words, HGSI presents this information in the form of a pie chart; the process is called Spectrum Analysis and this is what it looks like:


We’re almost done now.  The process to do this analysis took less than five minutes.  Okay, look at the pie chart – the fatter the slices, the more stocks out of the Top 100 are in that slice.  The Trading Companies & Distributors is the most well represented industry group so its slice is the fattest, with 11 stocks or 10.89% of the Top 100.  Next best represented is Homebuilding stocks, at 9.90% and the second fattest slice, and so forth.

By doing this every day, you can watch the groups wax and wane and see which ones are getting stronger and/or staying at the top of the heap.  How did the Top 100 perform?  Month to date through January 25 it’s up 9.22% with 97 gainers and 3 losers, compared to the S&P 500 Index which is up 3.45%.  Not bad!  So after all this analysis, what does it have to do with the blog?

Can you say Sector ETF’s?

While the stocks in the top industry group are spread out across several ETF’s, the second largest group in the pie is Homebuilders, which corresponds to ETF’s like ITB (home construction), XHB (homebuilders), and PKB (building and construction).  The third and fourth largest groups are tied at 7.92% each and Oil & Gas Equipment & Services is ably represented by XES.  While there isn’t always an ETF that closely matches the strongest industry groups, more often than not there is.

The ETF’s have done very well year-to-date as of last Friday. ITB is up 11.67%.  XES has gained 10.60%.  By creating a Top 100 list every day and watching to see which Wolfpacks keep showing up in fat slices, you know where you have a good opportunity to make a nice gain.

Ron’s movies with his commentary are posted each week and are available free to users of HGSI software.  I can’t encourage you strongly enough to try the 30-day trial of High Growth Stock software and see for yourself.

About Dave

David Steckler enjoyed 24+ years of experience as an investment counselor and portfolio manager before retiring. A former professor at Lindenwood University in Missouri, he also was a member and past president of the American Association of Professional Technical Analysts (AAPTA), and a member of the Market Technicians Association (MTA).
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