Focused On Sector Representation

Every month I take a closer look at the sectors most and least represented within my stock screen machine. As of today, there are 168 stocks have been identified as opportunities. Below you'll see the industry groups represented along with the number of stocks that represent that sector within the SSM:

I've discovered that this information can prove quite useful.

There are tremendous ways now to track and to measure relative performance of sectors. You can simply keep track of sector-focused ETFs that have performed well over a certain period of time. You can also simply just look at the stocks that have performed well and take notes on the sectors which are represented. But, the problem with both of these methods is that they really don't help you concentrate on sectors which have improving fundamentals as well. In essence, they'll tilt your portfolio toward the sectors which have the most momentum, but also offer the most risk following a long period of outperformance.

As many of you have found within your own research, it is exceptionally difficult to screen sectors by their fundamentals and while I've tried several methods to do this (like using valuation comparisons (i.e. using p/e ratios for a sector compared with the present and overall sector representation in the major indexes like the S&P 500), my results have been mixed. Some of these methods work better is certain types of markets, but I'm looking for tools that have more consistency at least when used in combination with these other methods.

Over the past few years, one of the more helpful tools was right in front of my face even though I ignored it for quite some time. That tool was simply to monitor sector trends within my favorite stocks screens. In essence, I take notes and track sector representation within my stock screen machine as I've done above. Relative strength scans and p/e historical comparisons don't really look at sectors from a bottoms-up focus like my favorite stock screens. In addition, because my screens do not have a "specific-sector" focus, it will often go out and find the sectors with the best prospects in the future because each screen is designed to look for different, but very good qualities.

Beyond understand and seeing sector trends, how does that translate into making more money in the market?

My research is ongoing, but I've seen a strong connection between sector outperformance and increasing sector representation by my stock screen machine. In essence, if a sector is highly represented in the SSM and the representation is growing in size (i.e. more and more stocks are showing up in that sector among all of my screens), it has been a good idea to tilt your portfolio toward that sector as well. Likewise, sectors show little or less representation are groups to avoid.

As you may recall, within my retirement portfolio, I allow for a 20% actively managed position and this year I've been using sector-focused ETFS to fill in part of that 20%. Over the past two years, I've been using my SSM as a tool for me to know how to tilt my portfolio allocation along these same lines.

Let me give you one very good example that illustrates why I'm starting to rely on SSM sector representation as a tool in this way. Earlier this year I purchased shares of the Market Vectors Steel Index Fund ETF (SLX) for my retirement account because at the time my stock screen machine was filed with companies like Ak Steel Holding Corp (AKS), Companhia Vale Do Rio Doce (RIO), Mechel Steel Group OAO ADS (MTL), Posco (PKX), Companhia Siderurgica Nacional S.A. (SID), Cleveland-Cliffs Inc (CLF), Chaparral Steel Company (CHAP), and Schnitzer Steel Indust (SCHN). That turned out to be a good decision because the SLX up quite a bit above my $52 entry point. Likewise, my long-term portfolio is biased toward oil & gas equipment and services sector which has the top representation in the SSM. For example I own the PowerShares Dynamic Oil Services Portfolio ETF (PXJ) in my retirement account to benefit from this sector development and would add into weakness if I see this top sector representation continue. I'm also watching sectors which show more and less representation and have found a connection with overall performance in those sectors as well. A point I'm likely to talk about more in future posts.

Bottom line, those of you who are focused on ETFs and lazy portfolio strategies may still want to utilize the stock screen machine for your sector focused research based on several studies I've completed. In a future upgrade to my stock screen machine, I'll be incorporating sector information filters so that this kind of analysis is more easily accessible to all, but I thought it important to point out now since I know more of you have been adopting a lazy portfolio strategy and may overlook using my stock screen machine in this way.