This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Apprenticed Investor: Tracking Elephants, Part 2

Relative Sector Strength

A company's performance is determined in large part by the sector it is in. (The health of the overall market is just as important.)

Sector charts clearly reveal whether an entire sector -- or the overall market -- is in an uptrend, a downtrend or merely going sideways.

Good advice: Even the best company in a sector trending downward has a tough time rallying.

I believe a bad stock in a good sector can go higher and do so more easily than a good stock in a bad sector. The PC business was awful after the Y2K upgrade. Even Dell (DELL) got killed in 2000.

Consider also the online colleges in 2003. It wasn't just Corinthian Colleges (COCO) -- they all screamed higher, even the lousy ones. That's sector strength at work.

Knowing this can help you decide whether to avoid a stock --or jump on board.

Charting History

A weekly three- or five-year chart gives you a broad historical overview of a stock or a sector. It provides an immediate snapshot of a firm's earnings history, both good and bad. Sure, you could read five years of 10-Ks and analyst reports, but why waste all that time? The picture is worth many thousands of words.

You can easily see how volatile a stock is with a quick glance. A chart showing wild intraday swings and sharp reversals might raise suitability issues for more conservative investors. A more measured, gradual chart might not fit the goals of short-term, more active traders. Either way, the chart provides some insight as to whether this stock is for you.

Reality Check

How often has a piece of fundamental data or a tidbit of "unknown" or hot information induced you to buy a stock? The chart lets you know whether that data point is baked "in the cake" already.

If someone tries to convince you to buy a stock because of the hot news he has, a quick glance tells you how warm or cool the news really is. A stock up significantly over the past three months implies that the hot tip you just got ain't so hot -- lukewarm is probably more like it. As my head trader is fond of saying, "Last man in pays for the beer."

Buying a stock based on an analysis that is not fresh or advantageous is a recipe for losing money.

Charts have more to offer than patterns and predictions. Savvy investors learn how to use them for recognizing warning signs, managing risk and selecting stocks. Over time, you will too.



1. Expect to Be Wrong 2. Your Fault, Reader
3. The Wrong Crowd 4. Bull or Bear? Neither
5. Know Thyself 6. Prepare for Battle
7. Bite Your Tongue 8. Don't Speak, Pt 2
9. The Zen of Trading 10. The Folly of Forecasting
11. Lose the News 12. Tracking Elephants, Pt 1
Check back for more of Barry Ritholtz's
Apprenticed Investor series

Barry Ritholtz is chief market strategist for Maxim Group, where his research and market analysis are used by the firm's portfolio managers and clients in the U.S., Europe and Japan. He also publishes The Big Picture, his macro perspectives on the economy and geopolitics, entertainment and technology industries, and is a member of the board of directors of Burst.com, a streaming media software company. At the time of publication, Ritholtz had no position in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Ritholtz appreciates your feedback; click here to send him an email.

3 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,131.97 +100.83 0.59%
S&P 500 1,998.98 +14.85 0.75%
NASDAQ 4,552.7590 +33.8570 0.75%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs