Four Groups That Should Outperform

This column originally appeared on RealMoney.com

Stocks and indices turned south last week, forcing newly minted bulls to question their blind faith in the nascent recovery effort. Although the January lows held up through Friday's closing bell, neither side can claim victory as we head into options expiration. Don't expect this volatile period to yield the perfect clarity that everyone is looking for.

Blue chips have outperformed since the January lows, with the S&P 500 index retracing about half the post-low rally, while the two Nasdaq averages gave up almost 80% before they turned higher on Thursday morning. These deep swings point to the development of a trading range between the broad highs and lows posted in the last three weeks.

Fortunately, this contraction phase should offer better trigger points for long and short entries. If you haven't noticed, the violent surges in recent weeks have made it very hard to find good positions, unless you're a momentum player. For the rest of us, these horrendous whipsaws are making it almost impossible to carry overnight risk.

This air pocket insanity should ease up as institutions move back to the sidelines and wait for the next larger-scale trend to take control of the ticker tape. In the meantime, I'll be looking for the re-emergence of a stock-picker's market, in which good chart patterns perform relatively well while the ugly ones get uglier.

In this regard, let's take a look at four market groups that escaped the selling pressure during last week's landslide. In theory, these should be the sectors that offer great trades during a relatively benign recovery period in which bulls are reluctant to act, while short-sellers get put back on the defensive.

First, let's eliminate three groups from this list: homebuilders, banks and retailers. Sorry, Charlie, I'm not going to call a bottom in these beaten-down sectors. Legitimate recoveries after long downtrends take months or longer, not days or weeks. So I'll let those engaged in the popular sport of knife-catching to pound the tables on these serial underperformers.

streetTracks Gold Trust

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Source: eSignal

Precious-metal stocks ticked higher last week after gold held above $900, despite a series of bear raids. It seems inevitable that the yellow metal will eventually trade up to $1,000. We might be looking at the start of that dramatic run right now.

You can take advantage of the move with the streetTracks Gold Trust (GLD Quote) ETF, which tracks the price of gold bullion.

Want to play the stocks directly? Kinross Gold (KGC Quote), Yamana Gold (AUY Quote), and Newmont Mining (NEM Quote) look like excellent vehicles to take advantage of the secular precious-metals rally.

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Invacare

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Source: eSignal

All sorts of medical stocks continue to outperform in this weak environment. This tracks the group's behavior during the last bear market, in which many components posted new highs while the hottest millennium stocks dropped over 90%. But it's hard to get a handle on this broad sector because there are dozens of niche performers.

Health care-equipment provider Invacare (IVC Quote) emerged from a long downtrend in 2007. It topped out in October and dropped into an orderly correction until the start of February, when it burst higher on heavy volume. It's been consolidating those gains for the six trading days and could move considerably higher in the weeks ahead.

Other health care stocks with bullish price patterns include Intuitive Surgical (ISRG Quote), Pharmaceutical Product Development (PPDI Quote), and Becton Dickinson (BDX Quote).

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CF Industries

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Source: eSignal

It's no secret that agricultural chemical stocks have turned sharply higher since the January selloff. Even last week's nose dive couldn't break the group, which ticked higher on Friday following strong earnings from CF Industries (CF Quote). Notably, this sector leader looks ready to challenge its 2008 high at $120.98 and resume its long uptrend.

This corner of the market is jam-packed with stocks that are poised to carry on the leadership they displayed last year. These winners include Mosaic (MOS Quote), Terra Industries (TRA Quote), and Converted Organics (COIN Quote).

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Dow Jones Transportation Average

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Source: eSignal

Don't look now, but the Dow Jones Transportation Average has taken off like a rocket ship. The venerable index fell to a 17-month low in January but has recovered sharply, and is now in a good position to rally above resistance at 5000 later this year. In the meantime, the Transports are the momentum plays du jour in this wicked market.

You'll find hot action throughout the sector, but the railroad and trucking issues show the best upside. These include CSX (CSX Quote), Norfolk Southern (NSC Quote), and Werner Enterprises (WERN Quote).

This article was written by Alan Farley, whose newsletter "The Daily Swing Trade" brings readers daily stock ideas based on a study of technical analysis.