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Keeping Track Of Short-Term Momentum

10/28/09 09:55:45 AM
by Donald W. Pendergast, Jr.

As the broad markets begin to pause and/or correct, it may be beneficial to discern which industry groups are beginning to accelerate to the downside.

Security:   FBIOX, FSCFX
Position:   N/A

By most objective measures, the broad US market indexes have peaked (for the time being, anyway) and are likely to continue to move a bit lower into November. By measuring the rate of breakdown in the various stock industry groups, we may be able to better time short stock sales, put option purchases, or even better, close out existing long positions in weakening groups and then move to the safety of cash. This article will demonstrate how to construct a simple, weighted performance MetaStock exploration, one that will attempt to find the weakest and strongest industry groups over the last 30-day period in the market.

FIGURE 1: PERFORMANCE EVALUATION. A means to evaluate the performance of a stock, fund, or commodity over the past five-, 10-, and 30-day periods, with the five-day period receiving double weighting.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
A weighted performance exploration simply puts more emphasis on the more recent price (five market days) performance as opposed to the last 30 days' performance. To do that, we use this simple MetaStock exploration that tracks the five-, 10-, and 30-day performance of a group of Fidelity Select Sector mutual funds; see Figure 1 for the code.

If you have MetaStock, this should be a breeze for you to set up. For those with other charting software, the big idea is to measure the five-day performance in percentage terms, double-weight the five-day category, and then add the 10-day and 30-day performance figures to it. Then take that entire sum and divide it by three, which will give you a weighted score, allowing you to easily measure the relative performances of any number of stocks, indexes, commodities, exchange traded funds (ETFs), and mutual funds. Now let's look at some of the Select Sector funds that are showing the greatest amount of trend deterioration over the past 30-day period (see Figure 2).

FIGURE 2: WEAKEST SECTOR FUNDS. The five weakest Select Sector funds, using the MetaStock exploration code shown.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
A very interesting scene develops once we run our weighted performance exploration — the biotech group (FBIOX) is weakening at the fastest pace, followed by the air transportation group (FSAIX), the entire transportation sector (FSRFX), the entire electronics sector (FSELX), and the construction and housing industry group (FSHOX). Obviously, anyone currently long any of the stocks in these groups and sectors needs to either tighten their stops, purchase put options to do some hedging, or simply consider closing out their positions as soon as possible. Further, if the broad markets continue to move lower, at some point these funds may retrace a portion of their current decline, possibly offering nimble traders the opportunity to go short the stocks in these various groups and sectors.

FIGURE 3: STRONGEST SECTOR FUNDS. The five strongest Select Sector funds, using the MetaStock exploration code shown.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
Now, here's a look at the strongest funds over the past 30-day period, as shown in Figure 3. The automotive group (FSAVX), software and computer services group (FSCSX) and the entire technology sector have all strengthened slightly over the past month, an important bit of market information to know. Meanwhile, the energy services group (FSESX) and the entire energy sector (FSENX) have begun to decline over the last five market sessions, possibly a precursor of further weakness to come.

Running performance comparisons like this can't guarantee to put you in a winning trade, but it's still an essential filtering step, one that most professional traders use to help fine-tune their stock selection process. Begin to work with your own performance comparisons today and you'll likely see an improvement in your trading results over time.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address:

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