The RRG / SCTR Sector Drill Down Conundrum ?

SCAlchemist

How do you choose the Best Sector to drill down to find the Best Industries and then the Best Stocks?

How would you handle the RRG / SCTR conundrum when your are Drilling Down Sectors?

When I use the Free Charts and go to the Sector Summary, is shows that the best sector (according to SCTR) is the XLF (Technology) since the SCTR is 83.8 When you look at the same Sector Summary through the RRG, it shows that the XLV (Health Care) is the only sector in the leading sector, or the "best" sector at this time. But, the SCTR for the XLV is only 19.3

If you want to drill down to the best Industry and then to the best stocks, which sector would you start drilling down in, the XLF or the XLV?

Would you look at any other indicators before making your choice?

Thanks.

markd

Well, they are different measures of price performance, so the results are going to differ. I only have a cursory understanding of either system, but here's what I think I know.

RRG looks at performance relative to only ONE other symbol (the default is the $SPX) over one time frame (your choice, up to 29 weeks).

SCTR combines performance over multiple time frames and then ranks the symbol vs. ALL symbols (of the same SCTR category), not a specific index. The SCTR for XLV is probably low because it hasn't made a new high in a year, while XLK (not XLF - XLF is Financials) has broken out to new annual highs. Also, SCTR allows a high ranking for a stock that is falling if it is falling less than others. I think RRG can everything in the weakening or lagging category.

If you compare XLV and XLK only since February, XLV has done well. RRG's look back period doesn't care about a year ago, so it ranks it higher. Incidentally, when I did RRG, both XLK and XLV are in the improving sector, but XLV is turning down.

How you choose what is the best sector to drill down in depends on what you want to do. You need to choose a time frame that suits you. For instance, if you are a swing trader - you want to catch say three or four week lows and hold them for maybe three to five weeks, you don't care that XLZ (not a real symbol I don't think) is up 20% since last year but XLQ was down 5%. Maybe in the last three months XLZ is down from 30% and shows no signs of strong buying, while XLQ's 50 MA crossed above its 200 MA after a long decline. Which would you want to get into?

Unfortunately, the industry indices, $DJUS--, don't have SCTRs, so you can't rank them by SCTR. But you could decide on a time frame, say a month, and rank by ROC

[favorites list is ?? ] // your industry list

rank by ROC(21)

Play with the 21 to see what you get.

Another thing you could try

rank by ROC(21) - 21 days ago ROC(21)

In other words, which sector has the most improved rate of change since a month of ago. That might keep you out of toppy situations where momentum slows down. I haven't actually tried this - just off the top of my head.

SCAlchemist

Thanks, marcd. The ROC scan is more useful than I had previously considered.

markd

Although you can't scan for it directly, another thing to consider is Relative Strength of the stock vs. the appropriate indices - SP500 or NASD or whatever your choose for the market, then the stock's sector vs. the market indices, the industry vs. its sector, and the stock vs. its own industry index ($DJUSxx, or maybe industry ETFs). Ideally, all should be sloping up. You can either use a trend line or a moving average - you want the RS to be mostly above the rising or turning up moving average.

See the current and past Gatis Roze blog posts about using this factor in stock selection.

SCAlchemist

Excellent ! Thanks, that's a very useful tool.

Julius_RRG

Just jumping in here to clarify/rectify an earlier remark in this thread.

RRGs, by their nature and the way the JdK RS-Ratio and JdK RS-Momentum lines are constructed, look at the relative strength of ALL securities in a universe against ALL other securities in that universe. Not JUST to the benchmark.

That is actually where the biggest added value for RRGs is coming from because it enables people to visualize and analyze the interaction of a lot of different securities in one graph instead of having to look at a lot of 1-1 comparison graphs.

The benchmark is simply the center of the chart around which the rotation takes place!

Julius

markd

@Julius_RRG , my bad. Thanks for the correction, and thanks for taking the time to answer explain RRG so clearly.

Julius_RRG

not a problem, I should login more often