Industry Ranks


I’m working on my quarterly reshaping — where I choose new companies to enter my portfolio.  The first part of this is industry analysis.

My main industry model is illustrated in the graphic.  Green industries are cold.  Red industries are hot.  If you like to play momentum, look at the red zone, and ask the question, “Where are trends under-discounted?”  Price momentum tends to persist, but look for areas where it might be even better in the near term.

If you are a value player, look at the green zone, and ask where trends are over-discounted.  Yes, things are bad, but are they all that bad?  Perhaps the is room for mean reversion.

My candidates from both categories are in the column labeled “Dig through.”

If you use any of this, choose what you use off of your own trading style.  If you trade frequently, stay in the red zone.  Trading infrequently, play in the green zone — don’t look for momentum, look for mean reversion.

Whatever you do, be consistent in your methods regarding momentum/mean-reversion, and only change methods if your current method is working well.

Huh?  Why change if things are working well?  I’m not saying to change if things are working well.  I’m saying don’t change if things are working badly.  Price momentum and mean-reversion are cyclical, and we tend to make changes at the worst possible moments, just before the pattern changes.  Maximum pain drives changes for most people, which is why average investors don’t make much money.

Maximum pleasure when things are going right leaves investors fat, dumb, and happy — no one thinks of changing then.  This is why a disciplined approach that forces changes on a portfolio is useful, as I do 3-4 times a year.  It forces me to be bloodless and sell stocks with less potential for those wth more potential over the next 1-5 years.

I still like energy names here, utilities, and reinsurers, particularly those that are strongly capitalized.  I’m not concerned about hurricanes for the strongly capitalized; they will be around to benefit from the increase in pricing power after any set of hurricanes.

I’m looking for undervalued and stable industries.  Human resources — sure, more part time workers.  Healthcare information?  A growing field, even with the new “health bill.”  Same for Biotech.

Even in a double dip, toiletries will still be purchased.  Phone calls will still be made, and the internet will still be accessed.  Perhaps life insurers are worth a look here; after all, the Bush tax cuts are expiring, and there will be more demand for tax avoidance.

I’m not saying that there is always a bull market out there, and I will find it for you.  But there are places that are relatively better, and I have done relatively well in finding them.

At present, I am trying to be defensive.  I don’t have a lot of faith in the market as a whole, so I am biased toward the green zone, looking for mean-reversion, rather than momentum persisting.  The red zone is more highly cyclical than I have seen in quite a while.  I will be very happy hanging out in dull stocks for a while.


  • keith piccirillo says:

    Choice writing.
    One of Livermore’s quotes was it was always his staying in positions that made him the money. Be right and sit tight.
    “It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets.”
    Ken Heebner has been taking your advice for a couple of years…..he left insurance sector just when it took off which would have mitigated part of his bad stretch.

  • Guillermo says:

    Hi, do you think one day you could elaborate on how you created this model? I’m not asking for your model specifically, but how you went through the thought process that allowed you to create said model. I’ve done econometrics before and I know my way around a multiple regression, as well as some heavy programming, but I always get lost when creating models. I get obsessed with how to weigh factors, over-think details, and never end up getting anywhere.

  • Jim says:

    Interesting thoughts David. Your industry ranking looks similar to what used to be available on Prophet Charts before their demise. Do you have your own tools/methods for ranking industries or is there another resource that provides that analysis?


  • alex edgar says:

    *echos Guillermo’s request enthusiastically*
    This is one of my list of questions for those with the knowledge of investing.

    …except that I have absolutely no training in economics. Having just finished _Outliers_ & _Talent is Overrated_, I know I need a teacher. I don’t think it’d be enough to work through _The Intelligent Investor_ and play with Vanguard’s stock research tool (and virtual money on VSE) on my own.

  • matt says:

    Nice layout change.