Two Looks at Industry Rankings

Includes: DIA, QQQ, SPY
by: David Merkel, CFA

It is getting close to the time for my next portfolio reshaping, and so I look at my industry models, because industry performance is critical to the performance of stock portfolios. Here is the main model that I use:

This model uses industries from Value Line, and as such, the rankings incorporate earnings surprise, earnings momentum, price momentum, and analyst opinion, and a few other things as well. But here is another model that is mostly intermediate-term (10 month) price momentum:

These ranks are based off of the industry ranks in the S&P 1500. But both of these rankings tell a similar story. As I have said before, the red zone is for momentum players and the green zone for mean-reversion players (usually, value investors). Given the relatively hard run-up over the past nine months, I am inclined to favor safety over aggression. I am considering more stocks in the green zone, which has more stable defensive stocks, than the red zone, which has stocks that will do well if the economy has a strong recovery.

All that said, I tend to be eclectic — I look for industries where conditions can’t get much worse, and industries where the current trends are under-discounted.

What you want to do here is your choice, but I am aiming at the “green zone” and will lean against the idea of a sharp recovery.