The forest or the trees?
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Investor's Corner Tuesday, September 5, 2000
Group Charts Can't Pinpoint Leading Stocks
By David Saito-Chung Investor's Business Daily
In life, it often helps to see the forest, not the trees. But to excel in growth investing, you should do the opposite.
Charts that show the price action for stocks in the same industry are nice. They offer a handy snapshot of how the sector is faring in the market. If the chart’s slope is rising, that “forest” of stocks is growing.
Group charts, however, offer little value when you want to unearth the market’s biggest winners. You have to dig deeper. Only the daily and weekly charts of single companies show the right time to buy.
When a sector turns hot, all its stocks don’t march forward in one row. Some sprint ahead while others play catch-up. Group charts mix the industry’s leaders with the laggards. If you start buying when the group is perking higher, you’re too late. The best stocks will have shot out of good bases.
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Take the chart of IBD’s telecom gear industry group, home to 222 firms. In the week ended May 14, 1999 (see point 1 in graphic), the chart hit its first new high in three years. But as the chart shows, the best telecoms ran out of the gates up to six months earlier.
Nokia, the world’s No. 1 cell-phone maker, flew out of a three-month double-bottom base in the week ended Oct. 23, 1998. By May 1999, the stock was up 80% from its pivot. JDS Uniphase broke out in early December 1998 and was hitting new highs by Christmas, six months before the group did. Qualcomm broke out of a long base in January 1999 and - well, you know about the stock’s massive rally.
Lesser-quality names lagged these top-notch firms. Allen Telecom broke out of a double-bottom base in late April 1999. But after rallying 33%, the wireless gear firm went sideways for months as the best telecom stocks marked fivefold, even tenfold gains.
Buying the leaders extended well past their bases is risky. You could get in right before it goes through a normal correction, shaking you out.
While group charts offer limited value, it pays to know which groups are leading the market. IBD compares 197 industry groups against each other in terms of six-month price performance. The table is printed daily on the Industry Groups page in the print edition of IBD.
Look for stocks in groups that are in the top quartile, or those rated 1st to 50th. These groups tend to produce the market’s leaders. In mid-November 1998, the telecom-equipment group rose from 53rd to 48th, breaking into the top quartile.
IBD’s new highs list, which splits the names by sector, also makes it easy to spot which groups are leading the market. Electronics, medical and financial stocks crowded this list when the market began its current rally in early June.
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