Current Monthly Trading Article

Industry Groups to Watch During the Last Quarter
From intra-day to multi-year periods, one can identify bullish and bearish phases of the market that repeat often enough to be judged statistically significant. I’ve written here, for example, about both the Presidential and six-month cycles in the market, while others are described in Larry William’s “The Right Stock and the Right Time” and Yale and Jeffrey Hirsch’s “Stock Trader’s Almanac.”

Let’s consider now the historical performance of the 31 Industry Groups through the September-to-December period from 2000 to 2003, i.e., just before the recent business cycle bottom that reached its trough in November of ’01 (National Bureau of Economic Research). Of course, our goal is to find groups and their respective membership stocks that have performed significantly better than the market over this period, just as we begin to enter another chapter.

The table lists by Industry Group the average return by year, the excess return over the S&P 500, the summed excess return over the 2000-to-2003 period, and selected companies (with quality fundamentals) within each group. The Automotive Industry Group, for example, outperformed the S&P in each of the four years by a total of 32.2%, and MPX, HDI, and TM are the quality member stocks within that group. The chart also depicts the total return of the 31 Industry Groups.

As a statistician, I often question the significance of these patterns. It is one thing to see a pattern but quite another to assess its significance and therefore its usefulness. Using a statistical approach known as “Resampling,” I determined that one might expect a total return at or above the 32.2% level 8.2% percent of the time by chance alone (and at or above a 30.9% return 9.6% of the time by chance alone). These top three groups are significant enough to have a root cause and, therefore, significant enough to project a recurrent theme.

Industry Groups	2003 % Gain	Excess Over S&P	2002 % Gain	Excess Over S&P	2001 % Gain	Excess Over S&P	2000 % Gain	Excess Over S&P	2000- 2003 Gain	Membership Companies
Automotive	12.1	6.5	25.3	14.0	-10.9	10.5	11.1	1.2	32.2	MPX, HDI, TM
Health Services	10.7	5.1	15.3	4.1	-7.5	13.9	18.4	8.5	31.6	PMTI, PPDI, PDX, MNT, MSA, AMMD, AMED,CYTC, COO, CNC, AMHC, CVH, CMN, LAKE
Aerospace	18.7	13.1	20.2	8.9	-10.3	11.0	7.7	-2.2	30.9	AYL, UIC, DRS, TASR
Leisure	2.2	-3.3	21.0	9.8	-10.7	10.7	17.8	7.9	25.0	SBUX, PENN, MBG, CCL, ISCA, STN
Tobacco	4.4	-1.2	17.9	6.6	-6.0	15.3	10.9	1.0	21.7	BTI, RAI
Conglomerates	13.5	8.0	19.3	8.0	-6.5	14.8	0.3	-9.6	21.2	FO, HSC, MMM UTX, TMO
Diversified Services	6.1	0.5	18.6	7.3	-25.5	-4.1	26.8	16.9	20.5	EXBD, CME, RNT, AH
Internet	14.5	8.9	32.5	21.2	-39.4	-18.0	18.2	8.3	20.4	EBAY, SYMC, JUPM, WBSN
Manufacturing	5.7	0.1	21.3	10.0	-18.8	2.6	16.5	6.6	19.3	IMGC, CRDN, BDK, NDSN, CUNO, MIDD
Materials & Construction	-0.3	-5.9	19.7	8.4	-11.1	10.3	15.7	5.8	18.7	FRK
Nasdaq	1.9	-3.7	22.8	11.6	-28.3	-6.9	23.6	13.7	14.7
Wholesale	5.4	-0.2	13.5	2.3	-17.7	3.6	18.9	9.0	14.7	SCSC, PDCO, MSM, CEDC
Specialty Retail	0.6	-5.0	27.2	15.9	-18.4	3.0	10.2	0.3	14.2	MIK, CPRT, DKS
Transportation	5.1	-0.5	13.1	1.8	-9.8	11.6	10.7	0.9	13.8	FWRD, FDX, EXPD, LSTR, SCST, YELL, GMR,JBHT, KNGT, LFL, NAT NSC, OLG
Chemicals	11.6	6.0	16.6	5.3	-13.1	8.3	3.2	-6.7	13.0	BG
Russell 2000	-1.0	-6.6	24.4	13.1	-21.6	-0.2	14.6	4.7	11.0
Consumer Non-Durables	8.4	2.8	5.7	-5.6	-8.8	12.6	10.9	1.0	10.8	RL, DECK, BLL
Banking	-0.3	-5.9	16.9	5.7	-10.6	10.8	9.6	-0.3	10.3	NDE WSBK CCBI, EWBC, NARA
Financial Services	-4.2	-9.8	21.1	9.8	-20.8	0.6	19.3	9.4	10.0	ACF, IFIN, FMD
Computer Software	4.6	-1.0	19.2	7.9	-37.2	-15.8	28.7	18.8	9.9	WIT, NAP TZOO, CTSH, INFY
Insurance	5.5	-0.1	16.9	5.7	-16.0	5.4	7.4	-2.5	8.4	UCI, BRO UHCO, MFC
Food and Beverage	6.9	1.3	7.1	-4.2	-7.1	14.3	5.7	-4.2	7.2	HANS
Dow	6.5	0.9	10.5	-0.8	-16.6	4.8	10.8	0.9	5.8
Drugs	7.0	1.4	11.3	0.0	-26.5	-5.2	19.1	9.2	5.5	BIIB, BSTE
Metals & Mining	-1.3	-6.9	24.6	13.4	-19.9	1.5	6.8	-3.1	4.9	CRS, ARLP, BHB
Real Estate	-2.8	-8.4	9.8	-1.5	-5.0	16.4	7.5	-2.4	4.2	RWT, DRL, LEND, BMHC
Retail	-3.1	-8.7	19.1	7.8	-17.8	3.6	10.3	0.4	3.1	ARO, URBN, FAST, CLE, CHS, JOSB, BMHC, JCP
S & P	5.6	0.0	11.3	0.0	-21.4	0.0	9.0	0.0	0.0
Consumer Durables	-2.3	-7.9