All stocks are classified into a unique array of Industry Groups. Each Industry Group reflects the average characteristics of the stocks within the group. Industry Groups may be sorted, ranked and graphed in the same fashion as individual stocks.
The Power of Group Strength
Perhaps the most successful method of making money in the market is to buy top rated stocks in the timeliest Industries. Thus, one would identify the Industries with the highest Relative Timing ratings, and buy the stocks in those Industries with the highest ranking by VST-Vector. The power of group strength is so great that it is often better to buy a weak stock in an Industry with rising RT than a strong stock in an Industry with falling RT.
Buying stocks in the Industries with the highest percentage of ''B'' REC’s is also a very useful Strategy. These Industries invariably have high RT ratings. RealTime gives the number and percentage of Buys, Sells, and Holds for each data set you may be using.
Industry Group and Business Sector Rotation
A very effective Strategy is to track Industry rotation on a week-by-week basis. Invariably, the hottest Industries cool off and the coldest Industries warm up. Therefore it pays to watch both the top 30 and the bottom 20 Industries ranked by Relative Timing. Get out of Industries in which the RT is going down and into Industries with rising RT.
As will be mentioned later, the Delta Function is a very useful tool in monitoring Industry Group Rotation.
THE ACID TEST.
VectorVest Views 12/08/00
Given that most of us own stocks that have gone south lately, I have been discussing ways of turning losing stock positions into winners. Three weeks ago, I illustrated that dollar averaging works if done properly. Then, I showed how to generate cash from a weak stock by selling covered Call options. Last week, I demonstrated how to power up with Put options. The key to all of this, of course, is in knowing when to do what.
Selling covered Call options is a defensive tactic, and precise timing is not necessary. It can be done anytime you think a stock's price is peaking, stagnating or likely to go down. If the stock's price does go down, you get to keep the money from the Call you sold. If the stock's price goes up, and does not exceed your strike price, you still get to keep the money from the Call you sold. If the stock's price goes above your strike price, you can buy back the Call, sell another one at a higher price and still make money because the stock's price went up. Even if the stock gets called, you've cut your loss, and that can't be all bad.
Dollar averaging and/or selling naked Puts are offensive tactics and require much more precise timing. You want to really make sure that the stock has bottomed in price and is in an uptrend. This often requires a great deal of patience. The dollar averaging technique I described in my 11/17/00 essay will greatly reduce your chances of putting more money into a stock while it's still falling in price. Can you believe Lucent? It closed yesterday at $14.56 per share, down from $82.30. Is it time to buy more of this baby?
As of yesterday, the technique explained in my 11/17/00 essay is saying that it's still too early to buy more Lucent. In fact, I'm pleased to report the technique would have kept you out of Lucent all the way down. It's a good technique, but there is an easier, faster way of knowing when to play the upside of a fallen stock. I call it "The Acid Test."
Take a look at a graph of Lucent, (LU), in the Weekly mode. Adjust your graph settings to show Price, 10 week MA and 30 week MA. Notice that the 10 week MA broke below the 30 week MA on 02/04/00. It has remained so ever since. The time to start buying and/or selling Puts on Lucent is when the 10 week MA crosses up through the 30 week MA. This won't get you in at the exact bottom, but it will minimize the risk of getting you in while there's further downside deterioration. Take a look at the weekly graphs of McKesson-HBOC, (MCK); Boeing, (BA); Oxford Hlth, (OXFD) or Cracker Barrel, (CBRL). There are hundreds of other good examples illustrating the efficacy of the 10 week, 30 week MA crossover.
In summary: you can sell covered Calls just about anytime, but if you're thinking about dollar averaging or selling naked Puts, give it The Acid Test.