Investing--IBD: "Look For New Leadership During Correction"
investors.com
>>> Monday, October 16, 2000
Look For New Leadership During Correction
By Ed Carson
Investor's Business Daily
In every election, voters have the chance to keep their leaders in office or throw the bums out.
During some corrections, the market keeps many of the same leaders for the next rally, along with a few new names. At other times, it undergoes a wholesale change in leadership.
Your job is to figure out which stocks and which sectors will likely lead the market in the next big rally.
Coming out of the 1998 and 1999 corrections, investors saw many familiar standbys: Cisco Systems, Sun Microsystems and so on. Some other names began to join the list of “old leaders,” such as Yahoo, Brocade and Siebel Systems. For the past several years, the market has been dominated by techs.
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Image: New Leadership
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But the current sell-off has been much longer and deeper than in recent years. After seven months, the Nasdaq is down 35%.
The market is wringing out the excess speculation that has built up over the years. Despite strong profit growth, stocks became very expensive. Price-to-earnings ratios of 100, 200 and more became routine. Many Internets, biotechs and IPOs surged despite losing money.
Investors need to keep in mind that techs may pass the torch to a whole new crop of leaders. Right now the strongest candidate is the medical sector. Health care stocks have been among the best performers in recent months.
Energy stocks also have done well. But the oil patch is closely tied to oil prices. If they fall, the sector will likely head lower.
Many financials and some retailers were looking good. But the sell-off in recent days and weeks has trashed leaders like Lehman Bros.
Don’t hibernate during bear markets. This is the time to create a watch list of possible buys.
Focus on the top groups. IBD rates 197 industries by their six-month price performance on the Industry Groups page in the print edition. As of Thursday, six of the top 10 groups were medical.
Among the leading groups, look for quality stocks forming sound bases. The companies should deliver outstanding and consistent earnings and sales growth. Look for the very best companies in fast-growing industries. Big institutions, especially top-rated mutual funds, should be shareholders.
The stocks likely will be correcting but holding up better than most of their peers. A rising Relative Price Strength Rating or line is an important sign of strength during a bad market.
Add and prune this list along the way.
Follow the major averages and leading stocks. When a new rally eventually takes hold, the leaders will be the first out of the gate.<<< |
