It's that time again. Every few months, I like running this screen to find the new Top Sectors. And now it's especially timely after this recent pullback, which really wasn't that big a deal, but where more and more people are saying that we're looking at a sector rotation.
So, that being the case, it's important to see what new sectors and industries are being rotated into.
And since roughly half of a stock's price move can be directly attributed to the group that it's in, it's important to stay on top of this.
By definition, a strong Sector or strong Industry will have more of its companies moving higher than a weak Sector or weak Industry.
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 what's interesting is I found that just getting into an average stock in a strong group will often outperform the best stocks in a troubled group.
Put the Odds on Your Side
Just because stocks in the best groups have a tendency to outperform doesnt mean you can just pick anything and 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 favorite ways is to look at the percentage of stocks trading within 10% of their 52-week highs.
Specifically, I'll calculate the number of stocks trading within 10% of their 52-week highs and then divide that by the number of stocks in their group to get a percentage. The higher percentage of stocks trading near their highs, the better the group will score.
Some 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's sensitive enough.
If a group has been outperforming over the last 12 to 24 weeks, but then has a significant correction, it might still be ranked a top group because the gains were so large in the first part of the 12 or 24 week period that 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 high will show up right away. 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.
Groups with a higher percentage of stocks trading at or near their 52-week highs shows something positive is happening to the entire group.
5 Top Groups and 5 Top Stocks
Currently, the top 5 sectors are:
1) Finance - 45.5%
2) Utilities - 38.5%
3) Conglomerates - 37.2%
4) Retail-Wholesale - 36.8%
5) Consumer Staples - 34.0%
And here are 5 stocks, each from one of the top five sectors:
(MKTX - Snapshot Report) MarketAxess Holdings (Finance)
(DTE - Analyst Report) DTE Energy (Utilities)
(CSL - Snapshot Report) Carlisle Cos. (Conglomerates)
(GPI - Snapshot Report) Group 1 Automotive (Retail-Wholesale)
MHP McGraw-Hill (Consumer Staples)
All of these stocks are in the top Sectors as we've defined them and they are all on the move.
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