Jesse Livermore, one of the greatest investors ever discovered long ago just how important it was (and still is), to identify the real market leaders of a Strong Bull Market. He would continuously track and follow the leaders along with the overall market and notice how they would stand out in the crowd. He noticed they would continue to be strong even when the market was in a minor correction and how they would spring to life and appreciate more than all the other stocks when the market went up.
Another discovery he made about the Leaders of the market is how other stocks in the same group tended to act the same way and leading groups would move in lock step with the overall market.
His final observation while tracking Leading stocks and Leading groups was the fact that almost every new Bull Market produced new leaders from new leading industries. The “old” leaders from the past Bull Market were rarely the same stocks leading the next Bull Market.
I know, you say “That’s great Chad, Livermore made 100’s of millions, I just want to buy stocks that don’t suck” “Give me something I can use”.
Well, here you go…..
First things First. Sectors are a much wider category than Industry groups. When comparing stocks to buy, it is important to compare your potential buy to other stocks in its same group. For instance, the Consumer Services Sector is broken down into 3 subsectors and each of those subsectors has groups.
Example: Say you notice that Alibaba (BABA) is making new price highs. You’d want to look at how other stocks in the Broadline Retailers are doing, not companies in the Food & Drug Retailer, even though they both are part of the Consumer Services Sector.
Don’t worry, it’s easier than it sounds. I cover how to put all of this together so you can find the next Super stock in my Active Investor Course.
Leading stocks have the highest EPS, ROE and Highest Relative Strength numbers in their particular group. You can track leading Industries and Sectors at MarketWatch. You’ll want to make your investments in the top 2 or 3 stocks of the leading Industries or sectors. This way you’ll always invest in the best “merchandise”.
Another way to screen for possible leading groups, Sectors and Industries is to watch the “New High” list. Stocks making new highs tend to go higher and when you start to see a hand full of stocks from the same Group, Sector or Industry make new highs, make a note and research these companies. Chances are, these are one of your new leading Groups.
Did you know that studies have proven that nearly 50% of a stocks' move is due to its Industry and Sector? 37% is directly related to the Industry it is in and 12% from the Sector. When you concentrate on Stocks with outstanding Fundamentals and invest in companies that are also in the top 20% of all leading Groups, you are more likely to find the next Super Stock.
Pro Tip: Once you’ve identified a leading group or sector, avoid investing in the last company to break out and show strength. The true leaders are the first ones to start the march higher. Pass on the stock that is last in the group to go up.
One last piece of advice I’ll leave you with today is: We do not always need to be invested in the Market when it comes to individual stocks, especially when the market goes into a correction or Bear market. Don’t get discouraged, Bear Markets and Corrections reset stock bases and set them up for us to buy when the market turns around. Use Corrections and Bear Markets to watch and study fundamentally strong companies. Take notice of the stocks that actually go down the least or even go up. These are more than likely the future leading stocks when the market turns and goes back up. Put them on your watch list.
Until next week, hit me up with any questions or topics you’d like to cover in the future.
Welcome to the Nerdery,