My Main Industry Rotation Model

I have several industry rotation models.  Some are short-term, others are longer term.  My main one is in the back of my head as I analyze where the pain is growing, and nearing maximum intensity.  (If anyone wants me to share shorter term models, I can do that.  I don’t use them much though.)

For me, the idea in industry rotation is to find stocks that fit one of two paradigms: 1) strong companies in troubled industries, and 2) well-run, cheap companies in industries where favorable trends are over-discounted.  My main model attempts to address the former.

My model has 6 1/2 years of Value Line industry rank data.  It asks the following questions:

  1. What is the industry’s current rank?
  2. Relative to your rank history, where is your current rank compared to the maximum and minimum ranks?
  3. How many standard deviations are you above or below your average rank? and
  4. Compared to past history, what percentile is your Value Line rank compared to prior dates in history.

The results from these questions are weighted and turned into a grand rank. From highest to lowest, the weights go 1, 4, 3, 2 for the questions listed above.  This spreadsheet lists the final results.   Now the new ranks can be used in two ways, in value mode, or momentum mode.

Value Line ranks are a product of three factors: price momentum, earnings momentum, and analyst surprise.  They are momentum driven.  My model attempts to refine that, and give investors two ways to play the market.  If you like fast momentum-style trading, buy the companies in the red zone near the bottom of the list.  If you’re like me, buy the companies in dead industries in the green zone at the top of the list.

So what did I do here?  The list of industries entitled “dig through” I deemed interesting from the “green zone.”  I ran a screen on them to get a few more names for this current portfolio reshaping.  Here are the tickers:

HERO ADM SMG SE ABFS CMC CVX ESV GMRK GSF HES MRTN NAT NE NX OXY PDE PTSI RADN RDC SHOO TSO

Okay, so now I have two things ready to go: I have the full list of tickers that I will compare against my current portfolio.  I also have what my main industry rotation model recommends.  I call my methods “quantitative assisted,” because I use my intellect to overrule them when I think it is needed.   The next step is lining up all of the candidates against my current portfolio to help decide who to add in , and who to kick out.  More on that on Monday.