Charting Stocks

One of the ways market technicians try to predict sector out performance is by conducting a relative strength analysis. In a bear market the price charts of most sectors and stocks are moving down with the market. Some sectors are moving down more than the market, and so they are relatively weaker, and some are not going down as much as the market and so they are relatively stronger.

In a declining market, we want to isolate those sectors which are relatively strong in comparison to the market because they tend to hold up better through the correction. Relatively strong sectors also tend to lead the way in the early stages of a new bull market.

Each of the 10 charts below show both the price (top part of the chart) and the relative strength (bottom of chart). The relative strength line is calculated by dividing the sector by the stock market (S&P 500 index). You’ll notice that in most cases, the price line is going down, but the relative strength line is rising.

Below are the sectors which are the strongest on a relative basis.

Airlines: After years of under performance, the airline stocks may be beginning to buck the trend as oil prices have plummeted.

Utilities: Tend to be a conservative sector which holds up during declines. Lower interest rates are a big help as it reduces their input costs.

Consumer Staples: People like to eat (even in a recession) This sector has historically done well when times were tough.

Volatility: One of the big winners for 2008 was Volatility. I expect this trend to continue throughout all of 2009. Note: When volatility is in an uptrend, the market is in a downtrend. In other words, this is not good for the overall market.

Pharmaceuticals: Look set to outperform in 2009 as they did through the last bear market.

Healthcare: This sector should continue to hold up relative to the market. An aging US population should be a catalyst for a long term expansion.

Gold: I do not believe the bull market in gold is over and expect higher prices in 2009.

Japanese Stocks: Japanese stock market via the iShares EWJ is showing strength. I should add that part of the out performance has come because of the strengthening yen (Which I think continues through ‘09).

Biotechnology: This sector has really picked up steam and is one of the strongest going into 2009.

Japanese Yen: Still a favorite of mine. I do expect a short term correction in the yen, but I think it ends 2009 much higher.

It is important to understand that relative strength does not necessarily translate into gains. It may just mean that the sector went down less than the stock market and so investors should be cautious about investing in 2009. There is no evidence of a bottom in the foreseeable future.

Related posts:

1. Stock Market Performance Charts; Year to Date
2. Another Bailout Bill Another Selloff
3. Forecast 2009: There Will Be Blood
4. US Dollar Losing Steam
5. Harvard Endowment Fund Down 22%, Expects Worse for 2009