By Sam Stovall With the year's end upon us, it seems appropriate to assess how well my industry-momentum technique held up in the face of slumping stock prices. A reminder: This strategy looks at trailing 12-month price performances for each of the 116 subindustry indexes in the S&P Super 1500 index and assigns a relative strength ranking (RSR) of 5 (top 10%), 4 (next 20%), 3 (middle 40%), 2 (next 20%), or 1 (bottom 10%). The S&P Super 1500 Sector Scorecard lists the RSRs for all sectors and subindustries, and is available to BusinessWeek Online subscribers. For this column each week, I identify only the subindustries with relative strength rankings of 5.
As a result, one could say there are two ways to measure the performance of my industry-momentum technique: The portfolio approach, which buys a subindustry when its RSR hits 5 and sells when it falls to 3 or lower (which an investor could do by monitoring the scorecard), and the list approach, which would own only those subindustry indexes that appeared in this column.
CONSISTENT WINNER. I'm happy to report that both approaches beat the S&P Super 1500 in 2002, year-to-date through Dec. 27. The portfolio approach posted a decline of 8.3%, and the list approach delivered a loss of 9.5%. The S&P Super 1500 dropped 22.9%. (These results are based on the performances for the subindustry indexes and don't take taxes or commissions into consideration.)
And 2002 was no anomaly. Since December, 1995, the portfolio approach has outperformed the broader market five of seven times and posted a compound annual growth rate of 16.8%, vs. 6.4% for the S&P Super 1500. In addition, while the S&P Super 1500 has posted an average monthly advance of 0.7% since December, 1995, the average monthly gain for subindustries with an RSR of 5 was 1.8%.
As always, no one can guarantee that this technique will continue to outperform the market.
S&P Relative Strength Rankings
These industries carry 12-month relative strength rankings of "5" as of Dec. 27, 2002 -- meaning that they're in the top 10% of the 116 industries in the S&P Super 1500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600) based on prior 12-month price performance.
Largest Company (Market Cap.)
S&P STARS* Rank
Apparel, Accessories & Luxury Goods/Consumer Discretionary
Consumer Electronics/Consumer Discretionary
Harman International (HAR)
Distillers & Vintners/Consumer Discretionary
Constellation Brands (STZ)
Fertilizers & Agricultural Chemicals/Materials
IMC Global (IGL)
Newmont Mining (NEM)
Housewares & Specialties/Consumer Discretionary
Newell Rubbermaid (NWL)
Managed Health Care/Health Care
UnitedHealth Group (UNH)
Metal & Glass Containers/Materials
Photographic Products/Consumer Discretionary
Eastman Kodak (EK)
Yellow Corp. (YELL)
*S&P's ranking system for the appreciation potential of stocks over a 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell). Stovall is chief investment strategist for Standard & Poor's