New Top 5 Sectors

Stocks highlighted in this article are: Panera Bread Company (PNRA - Snapshot Report), Rollins, Inc. (ROL - Snapshot Report), Tivo, Inc. (TIVO - Analyst Report), Watson Wyatt Worldwide Co. (WW - Snapshot Report), The Hershey Company (HSY - Analyst Report) and ICF International, Inc. (ICFI - Snapshot Report).

We've mentioned it here before, but it's worth saying again; nearly half of a stock's price movement is tied to the performance of its respective group (Sector and Industry).

By definition, a strong Sector or strong Industry will have more of its companies moving higher than a weak Sector or weak Industry, because by definition, a Sector or Industry is simply a group of similar stocks.

If the majority of stocks are going down in an industry, it can't be a strong industry. If more stocks are going up, it is a strong industry.

I've done some testing over the past and found that, oftentimes, just getting into an average stock in a strong group will often outperform the best stocks in a troubled group.

This doesn't mean you can just pick anything and you'll make money. Far from it. But it illustrates how powerful the underlying group is to the success of your stock picking.

There are several ways you can define the best Sectors or Industries.

One of my favorites is to look at the percentage of stocks trading within 10% of their 52-week highs.

A lot of people like looking at the percentage price change over the last 12 or 24 weeks. And that's fine – but I don't think it is sensitive enough.

Take the Oil and Energy sector last year for instance. If you looked at it based on its 24-week or 12-week price performance – it was continuously ranked one of the top Sectors even while it was collapsing.

That's because the gains were so large in the first part of the 12- or 24-week period – even a large pullback over a span of many weeks can be lost within the larger run-up that preceded it.

But by checking their position in comparison to their 52-week highs, a simple 10% pullback from their 52-week highs will show up. And if more and more companies within that group are pulling back from their highs by more than 10%, it'll be reflected in that Sector's rating and alert the investor that something systemic might be happening to that group as a whole rather than something that's just stock specific.

And like I said at the beginning, since roughly half of a stock's price performance can be directly attributed to the group that it's in, it's important to be able to identify the best Sectors quickly and accurately.

The top five Sectors based on the percentage of stocks at or within 10% of their 52 week highs are:

Retail-Wholesale - 14.23%
Construction - 8.24%
Consumer Discretionary - 7.95%
Finance - 7.92%
Consumer Staples - 7.61%
(and an extra one for those who are not interested in Financials)
Business Services 7.32%

I should note too that the percentages are awfully small. Prior to last year, a Sector would typically need more than 50% of its stocks trading within 10% of their 52-week high to get into one of the top spots. These lower numbers are a reflection of the kind of market we're in.

By the way, Oils-Energy are last at 2.82%.

Here are several stocks from each of those current top sectors (for Tuesday, 4/21/09):

PNRA - Snapshot Report Panera Bread Company - Retail-Wholesale
ROL - Snapshot Report Rollins, Inc. - Construction
TIVO - Analyst Report Tivo, Inc. - Consumer Discretionary
WW - Snapshot Report Watson Wyatt Worldwide Co. - Finance
HSY - Analyst Report The Hershey Company - Consumer Staples
ICFI - Snapshot Report ICF International, Inc. - Business Services

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.