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Three Hot Sectors to Watch Right Now

Looking beyond the market averages and focusing on specific sectors can help find interesting trends. After all, the Dow Jones Industrial Average and the S&P 500 haven't been doing much lately. The average daily move in the S&P over the past 20 days is only 3.7 points. For directional traders, the lack of movement and volatility can be frustrating because it becomes a lot harder to make money when the market is trading sideways in a narrow range. But by compartmentalizing the market into sectors, it's possible to find areas exhibiting vertical movement and volatility. As Jim Cramer is fond of saying, "There's always a bull market somewhere." With that in mind, here are three hot sectors to watch right now.

There is a frenzy going on in the rare-earth stocks. The action picked up noticeably last week after China cut export quotas on rare-earth materials. Rare Element Resources (REE) is up 60.9% since Dec. 23. During that time, Molycorp (MCP) has rallied 34.5%, China Shen Zhou (SHZ) surged 146.5%, and Avalon Rare Metals (AVL) gained 65.1%. The rare-earth sector is moving!

The relatively new Market Vectors Rare Earth Strategic Metals ETF (REMX) is a way to play the trend. The fund holds the aforementioned MCP, AVL and REE, but also a basket of other names from across the globe (click here for full list). Shares are up 15% since Dec. 23, and REMX options are beginning to catch the interest of traders as well. Vertical spreads in February or May calls might make sense for those investors looking for upside exposure to the red-hot rare-earth stocks.

Coal stocks have also been smoking! Arch Coal (ACI), for example, is up 45% since reporting earnings on Oct. 29. Shares notched a new 52-week high Monday on reports that flooding in Australia is taking a toll on coal supplies. Other names such as Massey Energy (MEE), Patriot Coal (PCX) and Peabody (BTU) delivered solid returns during the final few months of 2010 as well.

Market Vectors Coal Fund (KOL) is an interesting tool for playing the coal stocks. The exchange-traded fund holds ACI, PCX, BTU and 35 other names from the industry (click here for a complete list). Shares gained 26.3% in the fourth quarter of 2010 and are up 4.5% already in 2011. Players looking to play the coal sector and its powerful upward momentum might want to consider some bullish vertical spreads in the February or April contracts. Or, buying straddles and strangles in KOL might make sense if you expect volatility in the sector to pick up in 2011.

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