This Day On The Street
Continue to site
ADVERTISEMENT
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

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 - Get Report) got killed in 2000.

Consider also the online colleges in 2003. It wasn't just Corinthian Colleges (COCO - Get Report) -- 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

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

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
Stocks Under $10

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
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!
SYM TRADE IT LAST %CHG
DELL $0.00 0.00%
COCO $0.02 0.00%
AAPL $130.28 0.00%
EBAY $59.20 0.00%
GM $35.59 0.00%

Markets

DOW 18,080.14 +21.45 0.12%
S&P 500 2,117.69 +4.76 0.23%
NASDAQ 5,092.0850 +36.0220 0.71%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs