Technical Tuesday: This Sector Will Keep Surging
In January, I wrote to you about the alternative energy sector.
I told you that the sector's impressive strength in 2013 was likely to extend well into this year.
As it turns out, I was right.
Is this proof that I keep a crystal ball in my desk drawer?
Not at all.
But it is a reminder of my key point from back in January...
In the financial markets, trends tend to stay intact for long periods of time. So instead of trying to predict which sectors will outperform the market next quarter, start with the ones that outperformed in the recent quarter.
In its simplest form, this strategy is known as "relative strength quarterly rebalancing."
And as it turns out, alternative energy is a perfect case-in-point for adding this strategy to your trading arsenal.
Here's the chart I showed you in January of two of the sector's best-performing ETFs, Guggenheim Solar (NYSE: TAN) and First Trust ISE Global Wind Energy (NYSE: FAN) versus the S&P 500:
One showed nearly double the broad market's return, and the other beat it by nearly fourfold.
At the start of 2014 - with the above chart fresh in your mind - it would have been natural to assume that alternative energy might "come back to the pack" as we moved into the first quarter.
But if you took the advice I gave you and stayed in alternative energy for the first quarter based on its relative strength in the fourth quarter, you're probably smiling today.
Here's what TAN and FAN have done vs. the S&P so far this year:
Don't Make This Mistake
I'm sure you're with me so far.
Strong relative strength can be a great predictor of future performance.
Simple enough. But here's where many individual investors make a mistake...
The key term above is "relative." Don't confuse relative strength with absolute strength.
Here's how I explained it in my earlier article. Read this at least twice:
- What we are looking for in a relative strength analysis is the movement of TAN versus the S&P. When TAN moves up more than the S&P or moves down less than the S&P, each move counts as positive relative strength of TAN versus the S&P.
- A standard stock chart will show you whether a security is moving up or down in absolute terms. But [a] relative strength chart... shows an advance whenever TAN was outperforming the S&P. The chart shows a decline when TAN underperformed the S&P.
- A stock that makes higher highs and higher lows than its peers is more likely to continue its uptrend than to reverse it. That's why relative strength analysis is so powerful.
As long as you remember to make that distinction, looking at the previous quarter's relative strength can be a great clue to what might happen going forward.
And while this quarter still has a few trading days left, it's looking like alternative energy is poised for another strong showing in the second quarter.