Saturday, January 10, 2015

Market Carpet View of Sectors

When searching for medium to long term trading opportunities, especially around earnings season, I find it both interesting and rewarding to watch market sectors that are under-performing the rest of the market.  These under performers may provide some bargain basement entry opportunities, provided the underlying company is well managed and has significant growth potential.  Sometimes a market sector dog is a dog for a reason, but many times they have been beaten down well past a justified level and they now present a great opportunity for profit.

When looking for good entry points on fundamentally sound stocks, don't underestimate the impact overall market direction and overall sector direction have on the individual equity.  As we've seen time and again with strong market sell-offs, the force of the market as a whole will beat down stocks that are fundamentally very strong.  These become excellent buying opportunities since we can enter a long position at an artificially deflated price.

StockCharts has some excellent free charting tools that assist in this research.  My favorite "at a glance" view across all S&P 500 sectors is a Market Carpet chart as seen here:

Market Carpet Sector Map

The sectors I'm most interested in watching this earnings season are Financials and Utilities.  They've been beaten down for the past quarter and they may provide some interesting investment or long-term trade opportunities should this quarter's earnings demonstrate improvement.  Consumer Staples and Energy are the other two sectors that have been ravaged, and I'll also be keeping an eye on opportunities there, although in the case of Energy there needs to be some upward movement in the price of oil before I'm comfortable going long on stocks in that sector.

Another advantage of the free Market Carpet charts is the ability to zero in on a specific sector.  Here is the Market Carpet chart of the Financial sector.

Financial Sector Market Carpet

Unlike the overall sector view, to see the individual stocks in the sector you must hover over the block in which you have interest. The chart, though, does give you a nice "at a glance" view of all stocks in the sector, allowing you to zero in on the ones of most interest.

Watching the earnings announcements for the bottom five, two of which are reporting next week, we may have an early signal as to the overall direction this sector will take in 2015.  Strength in the bottom stocks may provide an opportunity to go long individually, or even to take a long position in the Financial SPDR (XLF) or the Financial iShares ETF (IYF).  Weakness in the top five would be a reason to avoid going long in this sector for the time being.  The same philosophy holds true for the other sectors that have been beaten down in the past quarter.

Remember, to "buy low and sell high" you must first identify stocks that are fundamentally strong, but have undergone a pullback or even a correction.  This doesn't necessarily apply to the very short time-frame trader who is only interested in daily momentum, but it's very applicable for the long-term trader or the investor seeking to hold the stock for an extended period.

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