To find the best stocks, it's crucial to look at the leading industry groups.
IBD research shows that 37% of a stock's price movement is tied directly to the performance of its industry group. An additional 12% is due to the strength of its overall sector. In other words, stocks aren't islands.
The industry subgroup rankings are found every day in IBD, usually on Page B2 under the rubric "How's The Market?" This table ranks industry groups according to their six-month price performance, with 1 being highest and 197 the lowest.
Stocks in the top 20 to 40 groups have a much better chance of success when the market turns up than those in lower-ranked groups. Also keep an eye out for groups that are moving up sharply within the rankings. Go to Stock Checkup at Investors.com to check a stock's industry group.
The medical, security and enterprise software groups were poised to move higher when the Nasdaq followed through Oct. 19, 2005, rising 1.7% in higher volume than the previous day. Why? Each group had risen through the ranks in the months leading up to the follow-through day.
As the table shows, the security software group had jumped to 20th from 196th while the enterprise software group had climbed to 21st from 98th. The top stocks in those groups were ready to move higher in the new uptrend.
Salesforce.com (NYSE:CRM - News), a member of the enterprise software group, climbed 47% from a breakout in mid-October to December.
Ultimate Software (NASDAQ:ULTI - News)also performed well.
In the medical software group, Cerner (NASDAQ:CERN - News) broke out of a cup base in April 2005 and ran up 73% over the next seven months.
Before settling on a stock, be sure to cross-reference it with the sector group rankings found in IBD's stock research tables. The sectors are ranked 1 to 33, with one being best. In general, focus on the top five or six sectors.
Sector groupings are much broader than industry groupings. In October 2005, eight industry groups made up the software sector. Not all of them performed as well as those listed above. Remember, different sectors lead bull markets at different stages of the cycle.
When you've identified a stock in a top-40 industry group or a top sector, check to see if it has strong sales and profit growth. Then spot the buy point in a sound base.
