Finding the Strongest Stocks in the Best Sectors

11/24/2011 12:01 am EST

Focus: STRATEGIES

Thomas Aspray

, Professional Trader & Analyst

In the first quarter of 2011, energy was the top sector. The Select Sector SPDR - Energy (XLE), was up 16.8%. In the next two quarters, XLE was down 26.6%. How can you tell when a sector or stock is acting stronger or weaker than the overall market?

Using relative performance or RS Analysis you can compare any stock or ETF to a major market average like the S&P 500 to see who is leading the market higher. In my analysis, I generally start by looking at the major sectors to find which ones are leading or lagging the market. Then, I look at the industry groups that make up that sector to find which ones are doing the best.

At the end of 2010, the oil and gas exploration industry group had very strong RS analysis. During the first quarter, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) was up 22.1%, significantly better that the energy sector as a whole.

The stocks in these industry groups can be analyzed for their relative performance and technical action to find the market leaders within the strongest industry group.

At the start of 2001, the RS and volume analysis were positive on Chesapeake Energy (CHK), which is a 3.5% holding in XOP. CHK was up 29.4% in the first quarter, beating XOP by over 7%. Of course, these companies can be further analyzed for financial strength and liquidity to pick the best stocks for your portfolio. Then, of course, you need to use and adjust your stop losses to help you exit the position when the trend changes.

For more on RS Analysis, please read "Spot Leaders and Losers with RS Analysis".

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