Last week we touched upon the idea of buying and holding stocks in rising Industry Groups and Business Sectors and selling those in falling Groups and Sectors. I did not get into this subject by accident. I did it because it is very important to examine Industry Group and Business Sector rotation when the market peaks, as it did two weeks ago, (August 2nd, to be exact).

I make it a regular practice of tracking the trends of Industry Groups and Business Sectors. I usually start out by clicking on Viewers in the Global Toolbar and selecting Sector Viewer. As of yesterday, one would see that "Steel" had the highest RT and was ranked at the top of the list. Sounds good, but please note that the Percent Price Change, %PRC, from the previous day was a nasty minus 2.29%. If one sets the date in the Drop Down Calendar to 08/02/05, clicks on Quick Test, selects "Test All Items," and clicks on OK, one would see that the average Price of every Business Sector has gone down since August 2nd. By sorting the %Price Change column in ascending order, one would see that "Steel" was among Sectors hit hardest since the market peaked. This is not unusual...the higher they fly, the faster they fall. So why is the RT still so high?

RT is a wonderful indicator and it allows us to see and compare price trends with a single click of the mouse. But it does not reveal the price history or day-to-day price changes that are also important in assessing a stock's price behavior and likely direction. Of course, one can click on History in the Local Toolbar and see the daily closing prices and the Percent Price Change, %PRC, of a stock, Industry Group or Business Sector, but this does not deliver the information as well as you would get it from a graph.

As an example, let's look at a graph of the Steel sector by setting the date in Sector Viewer back to 08/18/05 and clicking on Graph in the Local Toolbar. The Standard VectorVest Graph shows Price, Stop and a 40-day MA of Price in the upper portion and RT in the lower portion. Let's add a 20-day MA of Price. Note that the average price of the Steel Sector peaked on March 4, 2005, just before the most recent downturn. Four days later, Price broke below its 20-day MA, and then fell below its 40-day MA on the March 23rd. RT fell below 1.00 on March 28th, confirming the downturn.

The average Price of the Steel Business Sector finally hit bottom on May 13th. By that time, RT had already hit bottom on April 15th and was making a series of higher lows. RT was indicating that the downturn had dissipated. Price crossed above and below its 20-day MA shortly thereafter and finally rose above the 40-day MA on June 1st. RT crossed above 1.00 on June 16th, confirming the upturn. Most recently, the average Price of the Steel Business Sector peaked on August 11th, and fell below its 20-day MA on August 17th. RT had already peaked at 1.49 on August 2nd and was down to 1.28 as of yesterday. It will cross below 1.00 just about the same time as Price breaks below its 40-day MA.

What we have here is a situation in which the RT of the Steel Business Sector is still high but falling rapidly. It wouldn't surprise me if it did a repeat performance of last spring's downturn. If I owned any stocks in the Steel Business Sector, I would sell them. I could have come to conclusions such as this in other ways, but I have more confidence after Analyzing Graphs of Industry Groups and Business Sectors.

P.S. If you're looking at your stocks from a WatchList and you want to see what its Industry Group or Business Sector is doing, simply right click on that stock's row; then click on View Industry Graph or View Business Sector Graph.

P.P.S. Next week I'll write about a ProTrader graphical set-up that also does an excellent job of pinpointing Industry Group and Business Sector trend changes.