Go to Jeff Salisbury LWGate Home Page.From: "Katherine Malm" <kmalm@earthlink.net>
Subject: RE: [CANSLIM] many newbie questions about Industry Groups
Date: Wed, 19 Mar 2003 15:12:00 -0600
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This is a multi-part message in MIME format. - ------=_NextPart_000_0049_01C2EE29.E42EFE30 Content-Type: text/plain; charset="iso-8859-1" Content-Transfer-Encoding: 8bit Hi Duane, Wow...now those are some high quality newbie questions! The notion of industry group movement has many dimensions, some of it preference, some of it logic. I think at the core, there are some important questions and assumptions. (1) What makes a group a group? No question that this is the biggest question of them all. When studies claim that the "movement of the group contributes 50% to the move" or something equivalent, what group are they talking about? Is it stocks with the same primary SIC code? Stocks serving essentially the same business segment? Stocks that are economically cyclical vs. growth oriented? Stocks that are direct competitors? Stocks that are representative of a business segment benefitting from a common economic cycle, a common technological innovation, a common supportive legislative action? Etc. In other words, you can "group" stocks in any combination and make a statement about "the group"....problem is that from one data source to another, there is little similarity in both the number of groups and in the composition of the group. The IBD tries to do the best job it can at parsing stocks into meaningful groups, but you are still left with groups that have 7 members and others with 207. In some cases, direct competitors don't even fall within the *same* group. If you average activity of the "group", does it say the same thing in a group that has 7 stocks as it does for one with 207? (2) How is the group move measured (time period, averages across price or other metrics, etc.)? If you're ranking a group of stocks, over what period is the ranking done? 3 months? 6 months? 12 months? 25 years? You can make statements about a group, but the timeframe will make a world of difference in determining which group is a "top" group. How is the group ranking derived? If it is price action, is it measured equally across all time periods? Is it weighted from one period to the next? If it is based on average price across a group, how does the variation in prices within the group affect the average? Is it ranked based on other technical measurements? Etc. Again, you could take the same group of stocks and depending on how the ranking is done, a group can fall in the top half or the bottom half of the rankings. Same stocks, different results. (3) What makes a group a leading group? Even if you make reasonable assumptions in questions 1 and 2 for a particular investing style, you're still left with the most important question of all. How does a group *become* a leading group? It *becomes* a leading group because one or more stocks in the group begin to rise from the ashes. As those stocks "outperform" (in whatever measure of outperformance one designates) the *average* for the group measurement rises. As that average rises, the group becomes a "leading" or "top" group. Think about the implications of that, however. That is, the movement of the individual components leads to a higher group measurement. That may attract attention from a trading or economic perspective, but there's no doubt that the underlying fundamentals, economics, innovations, etc. that drew money to the leading stocks drove the group as a whole. It doesn't take a lot of rocket science to know that when a group is down in the dumps, the same holds true in reverse. Money isn't taken away from a group because the group in in the dumpers, the group is in the dumpers because money is taken out of it, driving the average for the group down. Chicken and egg stuff, but important when thinking about those studies that tell you "if you put your money in leading groups, your returns are better." To that, I say a big DUH. Groups are at the bottom because the individual stocks that comprise the group are technically in the dumpers. In CANSLIM investing in particular, the idea is to focus on *strength* and to avoid *laggard* stocks. WON has never said to buy "only" from the top 25% of groups. He says, that "on average, stocks in the top 50 or 100 groups perform better than those in the bottom 100."* ON AVERAGE. He says to focus the *majority* of your buying from within these top groups so that you raise the odds of success and so that you can benefit from the follow on effect. At the same time, however, he repeatedly says to look for leading stocks showing outperformance and that are *leading* the industry move. This is where there is the most bang for the buck. From Investor's Corner 10/26/99 "The logic here is to jump in when the group breaks a downtrend, or rises above a base and heads for new high ground. But for the investor in search of only the best stocks, this strategy is flawed. When a sector breaks out, its top dogs will have already raced ahead of the pack." From Ask Bill 7/02 "Studies show that 37% of a stock's price movement is directly tied to the performance of its industry group. Another 12% is due to strength in its overall sector. Therefore, roughly half of a stock's move is due to the strength of its respective industry. But note that just because the relative strength of the group is on the low side, does not necessarily mean the group is bad. Sometimes, there are only a few true leaders in a group. If the group happens to be large or its is just beginning a move, the group relative strength rating may be skewed to the low side." A similar Ask Bill was published 3/11/03. "[K]eep in mind that emerging leaders may be farther down the industry group rankings." In practical terms, that means there are 2 complementary approaches to using industry group information: top down and bottoms up. I don't think it matters where you start, but you need to do *BOTH*. I prefer bottoms up as a core practice, using industry analysis (top down) as a secondary mining technique. But I have always performed both. Bottoms Up-- A methodical approach to finding individual stocks that are outperforming the market, their industry brethren and/or their direct competitors. Picked up at the appropriate time, you get the full move in leading stocks. Industry analysis is used as a confirming indicator of the move. This is the opportunity to check that there is at least one other direct competitor or industry brethren that is showing high relative strength. Look for indications that the group as a whole may be rolling over. That is, the laggard stocks have already begun to falter and/or fail. Leading stocks will be the last to roll over, so this is where you can pick up on clues that an impending breakout may fail. Mining for this also includes mining in *rising* rather than *top* industry groups. Top Down--Skim the top industry groups to see which are continuing a strong move up vs those that are starting to fail and soon will be moving down in the rankings. Review the stocks within the group to find which are currently setting up for a fresh breakout. Better if these are breakouts from 1st or 2nd stage bases. If the leaders are putting in a consolidation in a 3rd or 4th stage base and the laggards are starting to roll over....look out below! There are ways to streamline these processes so that this can be done efficiently and quickly-- narrow down the list of potential candidates based on a meaningful combination of technicals/fundamentals, use a fast charting service with the essential indicators, flip through the charts or key technical indicators of the stocks within the industry, methodically mine for stocks day to day as technical indicators show that they are setting up for a potential breakout (seek technical strength in individual stocks), and constantly hone technical chart reading skills so that you can tell in 15 seconds or less whether a chart is worth pursuing. That means you need a good combination of tools and personal skills. The tools are just time vs. money and the skills are just practice, practice, practice. Katherine *HTMMIS, 3rd Ed., pg. 201 -----Original Message----- From: owner-canslim@lists.xmission.com [mailto:owner-canslim@lists.xmission.com]On Behalf Of Duane Runnels Sent: Wednesday, March 19, 2003 9:41 AM To: canslim@lists.xmission.com Subject: [CANSLIM] many newbie questions about Industry Groups I’m trying to figure out the importance of Industry Groups. WON says pick a leader in a top 20% group and that half of a stock’s performance is related to its group. WON also says pick from the top 6 groups making new highs. (IBD Rule #11). Is it a valid screen then to start by looking only at the top 40 groups, find the leaders, and then check for RS and EPS, etc? There doesn't seem to be a lot of discussion here about industry groups, although there have been several posts recently. Do you consider group strength then as a secondary factor? It is not part of CANSLIM is it? Some of you even invest only in certain sectors. I particularly liked Katherine’s posts regarding researching groups showing new rising strength. I watch the Industry Groups table and the list changes dramatically from one month to the next. Is this a bear aberation or normal? How much of a group’s strength is dependent on one stock’s performance? If this is the case, isn’t group performance a misnomer? Also I see that certain groups have a lot of new highs, but also a lot of new lows. Is this just a reflection of today’s market conditions? In short, how much attention do you pay to the industry group and why?THANKS. - ------=_NextPart_000_0049_01C2EE29.E42EFE30 Content-Type: text/html; charset="iso-8859-1" Content-Transfer-Encoding: quoted-printable <!DOCTYPE HTML PUBLIC "-//W3C//DTD HTML 4.0 Transitional//EN"> <HTML xmlns:o =3D "urn:schemas-microsoft-com:office:office"><HEAD> <META http-equiv=3DContent-Type content=3D"text/html; = charset=3Diso-8859-1"> <META content=3D"MSHTML 6.00.2800.1126" name=3DGENERATOR> <STYLE></STYLE> </HEAD> <BODY bgColor=3D#fffcf0> <DIV><SPAN class=3D884465515-19032003>Hi Duane,</SPAN></DIV> <DIV><SPAN class=3D884465515-19032003></SPAN> </DIV> <DIV><SPAN class=3D884465515-19032003>Wow...now those are some high = quality newbie=20 questions!</SPAN></DIV> <DIV><SPAN class=3D884465515-19032003></SPAN> </DIV> <DIV><SPAN class=3D884465515-19032003>The notion of industry group = movement has=20 many dimensions, some of it preference, some of it logic.</SPAN></DIV> <DIV><SPAN class=3D884465515-19032003></SPAN> </DIV> <DIV><SPAN class=3D884465515-19032003>I think at the core, there are = some=20 important questions and assumptions.</SPAN></DIV> <DIV><SPAN class=3D884465515-19032003></SPAN> </DIV> <DIV><SPAN class=3D884465515-19032003>(1) What makes a group a=20 group?</SPAN></DIV> <DIV><SPAN class=3D884465515-19032003></SPAN> </DIV> <DIV><SPAN class=3D884465515-19032003>No question that this is the = biggest=20 question of them all. When studies claim that the "movement of the group = contributes 50% to the move" or something equivalent, what group are = they=20 talking about? Is it stocks with the same primary SIC code? Stocks = serving=20 essentially the same business segment? Stocks that are economically = cyclical vs.=20 growth oriented? Stocks that are direct competitors? Stocks that are=20 representative of a business segment benefitting from a common economic = cycle, a=20 common technological innovation, a common supportive legislative action? = Etc. In=20 other words, you can "group" stocks in any combination and make a = statement=20 about "the group"....problem is that from one data source to another, = there is=20 little similarity in both the number of groups and in the composition of = the=20 group. The IBD tries to do the best job it can at parsing stocks into = meaningful=20 groups, but you are still left with groups that have 7 members and = others with=20 207. In some cases, direct competitors don't even fall within the *same* = group.=20 If you average activity of the "group", does it say the same thing in a = group=20 that has 7 stocks as it does for one with 207? </SPAN></DIV> <DIV><SPAN class=3D884465515-19032003></SPAN> </DIV> <DIV><SPAN class=3D884465515-19032003>(2) How is the group move measured = (time=20 period, averages across price or other metrics, etc.)?</SPAN></DIV> <DIV><SPAN class=3D884465515-19032003></SPAN> </DIV> <DIV><SPAN class=3D884465515-19032003>If you're ranking a group of = stocks, over=20 what period is the ranking done? 3 months? 6 months? 12 months? 25 = years? You=20 can make statements about a group, but the timeframe will make a world = of=20 difference in determining which group is a "top" group. How is the group = ranking=20 derived? If it is price action, is it measured equally across all time = periods?=20 Is it weighted from one period to the next? If it is based on average = price=20 across a group, how does the variation in prices within the group affect = the=20 average? Is it ranked based on other technical measurements? Etc. Again, = you=20 could take the same group of stocks and depending on how the ranking is = done, a=20 group can fall in the top half or the bottom half of the rankings. Same = stocks,=20 different results.</SPAN></DIV> <DIV><SPAN class=3D884465515-19032003></SPAN> </DIV> <DIV><SPAN class=3D884465515-19032003>(3) What makes a group a leading=20 group?</SPAN></DIV> <DIV><SPAN class=3D884465515-19032003></SPAN> </DIV> <DIV><SPAN class=3D884465515-19032003>Even if you make reasonable = assumptions in=20 questions 1 and 2 for a particular investing style, you're still left = with the=20 most important question of all. How does a group *become* a leading = group? It=20 *becomes* a leading group because one or more stocks in the group begin = to rise=20 from the ashes. As those stocks "outperform" (in whatever measure of=20 outperformance one designates) the *average* for the group measurement = rises. As=20 that average rises, the group becomes a "leading" or "top" group. Think = about=20 the implications of that, however. That is, the movement of the = individual=20 components leads to a higher group measurement. That may attract = attention from=20 a trading or economic perspective, but there's no doubt that the = underlying=20 fundamentals, economics, innovations, etc. that drew money to the = leading stocks=20 drove the group as a whole. It doesn't take a lot of rocket science to = know that=20 when a group is down in the dumps, the same holds true in reverse. Money = isn't=20 taken away from a group because the group in in the dumpers, the group = is in the=20 dumpers because money is taken out of it, driving the average for the = group=20 down. Chicken and egg stuff, but important when thinking about those = studies=20 that tell you "if you put your money in leading groups, your returns are = better." To that, I say a big DUH. Groups are at the bottom because = the=20 individual stocks that comprise the group are technically in the = dumpers. In=20 CANSLIM investing in particular, the idea is to focus on *strength* and = to avoid=20 *laggard* stocks.</SPAN></DIV> <DIV><SPAN class=3D884465515-19032003></SPAN> </DIV> <DIV><SPAN class=3D884465515-19032003>WON has never said to buy "only" = from the=20 top 25% of groups. He says, that "on average, stocks in the top 50 or = 100 groups=20 perform better than those in the bottom 100."* ON AVERAGE. He says to = focus the=20 *majority* of your buying from within these top groups so that you raise = the=20 odds of success and so that you can benefit from the follow on effect. = At the=20 same time, however, he repeatedly says to look for leading stocks = showing=20 outperformance and that are *leading* the industry move. This is where = there is=20 the most bang for the buck. From Investor's Corner 10/26/99 "The = logic=20 here is to jump in when the group breaks a downtrend, or rises above a = base and=20 heads for new high ground. But for the investor in search of only the = best=20 stocks, this strategy is flawed. When a sector breaks out, its top dogs = will=20 have already raced ahead of the pack." From Ask Bill 7/02 "Studies show = that 37%=20 of a stock's price movement is directly tied to the performance of its = industry=20 group. Another 12% is due to strength in its overall sector. Therefore, = roughly=20 half of a stock's move is due to the strength of its respective = industry. But=20 note that just because the relative strength of the group is on the low = side,=20 does not necessarily mean the group is bad. Sometimes, there are only a = few true=20 leaders in a group. If the group happens to be large or its is just = beginning a=20 move, the group relative strength rating may be skewed to the low side." = A=20 similar Ask Bill was published 3/11/03. "[K]eep in mind that emerging = leaders=20 may be farther down the industry group rankings."</SPAN></DIV> <DIV><SPAN class=3D884465515-19032003></SPAN><SPAN=20 class=3D884465515-19032003></SPAN> </DIV> <DIV><SPAN class=3D884465515-19032003>In practical terms, that = means there=20 are 2 complementary approaches to using industry group information: top = down and=20 bottoms up. I don't think it matters where you start, but you need to do = *BOTH*.=20 I prefer bottoms up as a core practice, using industry analysis (top = down) as a=20 secondary mining technique. But I have always performed = both.</SPAN></DIV> <DIV><SPAN class=3D884465515-19032003></SPAN> </DIV> <DIV><SPAN class=3D884465515-19032003>Bottoms Up-- A methodical approach = to=20 finding individual stocks that are outperforming the market, their = industry=20 brethren and/or their direct competitors. Picked up at the appropriate = time, you=20 get the full move in leading stocks. Industry analysis is used as a = confirming=20 indicator of the move. This is the opportunity to check that there is at = least=20 one other direct competitor or industry brethren that is showing high = relative=20 strength. Look for indications that the group as a whole may be rolling = over.=20 That is, the laggard stocks have already begun to falter and/or fail. = Leading=20 stocks will be the last to roll over, so this is where you can pick up = on clues=20 that an impending breakout may fail. Mining for this also includes = mining in=20 *rising* rather than *top* industry groups.</SPAN></DIV> <DIV><SPAN class=3D884465515-19032003></SPAN> </DIV> <DIV><SPAN class=3D884465515-19032003>Top Down--Skim the top industry = groups to=20 see which are continuing a strong move up vs those that are starting to = fail and=20 soon will be moving down in the rankings. Review the stocks within the = group to=20 find which are currently setting up for a fresh breakout. Better if = these are=20 breakouts from 1st or 2nd stage bases. If the leaders are putting in a=20 consolidation in a 3rd or 4th stage base and the laggards are starting = to roll=20 over....look out below!</SPAN></DIV> <DIV><SPAN class=3D884465515-19032003></SPAN> </DIV> <DIV><SPAN class=3D884465515-19032003>There are ways to streamline these = processes=20 so that this can be done efficiently and quickly-- narrow down the = list of=20 potential candidates based on a meaningful combination of=20 technicals/fundamentals, use a fast charting service with the = essential indicators, flip through the charts or key technical = indicators of the=20 stocks within the industry, methodically mine for stocks day = to day as=20 technical indicators show that they are setting up for a potential = breakout=20 (seek technical strength in individual stocks), and constantly hone = technical=20 chart reading skills so that you can tell in 15 seconds or less whether = a chart=20 is worth pursuing. That means you need a good combination of tools and = personal=20 skills. The tools are just time vs. money and the skills are just = practice,=20 practice, practice. </SPAN></DIV> <DIV><SPAN class=3D884465515-19032003></SPAN> </DIV> <DIV><SPAN class=3D884465515-19032003></SPAN>K<SPAN=20 class=3D884465515-19032003>atherine</SPAN></DIV> <DIV><SPAN class=3D884465515-19032003></SPAN> </DIV> <DIV><SPAN class=3D884465515-19032003>*HTMMIS, 3rd Ed., pg. = 201</SPAN></DIV> <DIV><SPAN class=3D884465515-19032003></SPAN> </DIV> <BLOCKQUOTE dir=3Dltr style=3D"MARGIN-RIGHT: 0px"> <DIV class=3DOutlookMessageHeader dir=3Dltr align=3Dleft><FONT = face=3DTahoma=20 size=3D2>-----Original Message-----<BR><B>From:</B>=20 owner-canslim@lists.xmission.com=20 [mailto:owner-canslim@lists.xmission.com]<B>On Behalf Of </B>Duane=20 Runnels<BR><B>Sent:</B> Wednesday, March 19, 2003 9:41 = AM<BR><B>To:</B>=20 canslim@lists.xmission.com<BR><B>Subject:</B> [CANSLIM] many newbie = questions=20 about Industry Groups<BR><BR></FONT></DIV> <DIV><FONT face=3DArial size=3D2> <P class=3DMsoNormal style=3D"MARGIN: 0in 0in 0pt"><SPAN=20 style=3D"FONT-FAMILY: Tahoma"><FONT size=3D3>I=92m trying to figure = out the=20 importance of Industry Groups.<SPAN=20 style=3D"mso-spacerun: yes"> </SPAN>WON says pick a leader = in a top=20 20% group and that half of a stock=92s performance is related to its = group.<SPAN=20 style=3D"mso-spacerun: yes"> </SPAN>WON also says pick from the = top 6=20 groups making new highs. (IBD Rule #11).<o:p></o:p></FONT></SPAN></P> <P class=3DMsoNormal style=3D"MARGIN: 0in 0in 0pt"><SPAN=20 style=3D"FONT-FAMILY: Tahoma"><FONT = size=3D3> <o:p></o:p></FONT></SPAN></P> <P class=3DMsoNormal style=3D"MARGIN: 0in 0in 0pt"><SPAN=20 style=3D"FONT-FAMILY: Tahoma"><FONT size=3D3>Is it a valid screen then = to start by=20 looking only at the top 40 groups, find the leaders, and then check = for RS and=20 EPS, etc?<o:p></o:p></FONT></SPAN></P> <P class=3DMsoNormal style=3D"MARGIN: 0in 0in 0pt"><SPAN=20 style=3D"FONT-FAMILY: Tahoma"><FONT size=3D3>There doesn't seem to be = a lot of=20 discussion here about industry groups, although there have been = several posts=20 recently.<SPAN style=3D"mso-spacerun: yes"> </SPAN>Do you = consider group=20 strength then as a secondary factor? It is not part of CANSLIM = is=20 it? Some of you even invest only in certain = sectors.</FONT></SPAN></P> <P class=3DMsoNormal style=3D"MARGIN: 0in 0in 0pt"><SPAN=20 style=3D"FONT-FAMILY: Tahoma"><FONT = size=3D3> <o:p></o:p></FONT></SPAN></P> <P class=3DMsoNormal style=3D"MARGIN: 0in 0in 0pt"><SPAN=20 style=3D"FONT-FAMILY: Tahoma"><FONT size=3D3>I particularly liked = Katherine=92s=20 posts regarding researching groups showing new rising strength. I = watch the=20 Industry Groups table and the list changes dramatically from one month = to the=20 next.<SPAN style=3D"mso-spacerun: yes"> </SPAN>Is this a bear = aberation or=20 normal?<SPAN style=3D"mso-spacerun: yes"> =20 </SPAN><o:p></o:p></FONT></SPAN></P> <P class=3DMsoNormal style=3D"MARGIN: 0in 0in 0pt"><SPAN=20 style=3D"FONT-FAMILY: Tahoma"><FONT = size=3D3> <o:p></o:p></FONT></SPAN></P> <P class=3DMsoNormal style=3D"MARGIN: 0in 0in 0pt"><SPAN=20 style=3D"FONT-FAMILY: Tahoma"><FONT size=3D3>How much of a group=92s = strength is=20 dependent on one stock=92s performance?<SPAN style=3D"mso-spacerun: = yes"> =20 </SPAN>If this is the case, isn=92t group performance a misnomer?<SPAN = style=3D"mso-spacerun: yes"> </SPAN>Also I see that certain = groups have a=20 lot of new highs, but also a lot of new lows.<SPAN=20 style=3D"mso-spacerun: yes"> </SPAN>Is this just a reflection of = today=92s=20 market conditions?</FONT></SPAN></P> <P class=3DMsoNormal style=3D"MARGIN: 0in 0in 0pt"><SPAN=20 style=3D"FONT-FAMILY: Tahoma"><FONT size=3D3></FONT></SPAN> </P> <P class=3DMsoNormal style=3D"MARGIN: 0in 0in 0pt"><SPAN=20 style=3D"FONT-FAMILY: Tahoma"><FONT size=3D3>In short, how much = attention do you=20 pay to the industry group and why?</FONT></SPAN><SPAN=20 style=3D"FONT-FAMILY: Tahoma"><FONT=20 size=3D3>THANKS.</FONT></SPAN></FONT></P></DIV></BLOCKQUOTE></BODY></HTML= > - ------=_NextPart_000_0049_01C2EE29.E42EFE30-- - - - -To subscribe/unsubscribe, email "majordomo@xmission.com" - -In the email body, write "subscribe canslim" or - -"unsubscribe canslim". 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