Picking Winners in the Market

01/23/2014 7:00 am EST

Focus: STOCKS

L.A. Little

Contributing Editor, Minyanville

A basic maxim of trading is to go with the strong and avoid the weak, writes LA Little of Technical Analysis Today; sure there are exceptions but that is the general rule.

Another maxim, although lesser known, is to generally pick the leaders in an industry group. That overlaps the prior maxim to some degree but sometimes can vary for industry groups to rotate into and out of favor. For example, picking the leading steel stock for most of last year probably would not have been advisable as the sector was weak but once money began to rotate to the sector, having the strongest one would have paid decent dividends.

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In this market, there are few weak sectors and those that were weak continue to see money rotate to them from time-to-time. To start this year, it has been gold stocks. I am sure they will find their limit and money will rotate elsewhere. The market is dynamic and always searching for valuations that are out of kilter. If you can pick up on those rotations early enough, you will be able to participate. One way we do that at TA Today at this time of the year is to focus on earnings and see where money is rotating to or continuing to pile in. Broker dealers is one area, so far, that has shown with Charles Schwab finding enthusiasm and conviction off its earnings report.

You want to seek those sectors where strength is apparent and avoid others. For example, financials (XLF) are generally mixed after their earnings. The same with semiconductors.

By LA Little of Technical Analysis Today

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