By Sam Stovall Every week in this column I feature the industry momentum list -- those groups that for the prior week were in the top 10% of S&P 1500 subindustry categories based on trailing 52-week
relative strength. That ranking suggests that those subindustries, by virtue of their high momentum, are likely to continue to outperform the overall market -- at least over the near term.
Now that 2003 is in the books, you're probably wondering how this technique worked. If I may say so, quite nicely indeed.
Take a look at the table below, which shows the average performance for industries ranked 5 (highest) through 1 (lowest) on trailing 52-week relative strength during 2003. (The distribution of industries ranked 5 through 1 is as follows: Relative Strength Ranking (RSR) of 5, highest 10% of industries; RSR-4, next 20%; RSR-3, middle 40%; RSR-2, next 20%; and RSR-1, bottom 10% of industries.) The final number is a simple average performance for all industries during 2003.
Avg. % change by Relative Strength Rank
As shown above, during 2003, the industries with the highest and lowest RSRs posted the strongest gains, while the middle designations either equaled or underperformed the average. While it's not unusual for the lowest-ranked industries to experience a pop in price from bargain-hunters seeking to benefit from a possible "dead-cat bounce", the jump's magnitude in 2003 is unusual. What was behind the outsized move? In my opinion, it may have something to do with 2003 being a turnaround year for the markets after a devastating three-year bear run.
However, a look at the longer-term trend tells a quite different story. Over the 1991-2003 period, only the industries with RSRs of 5 and 4 consistently beat the average performance of all industries. Of course, there's no guarantee that what has worked in the past will work in the future.
Industry Momentum List Update
For regular readers of the Sector Watch column, here's this week's list of the 11 industries in the S&P Super 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500) as of Jan. 2, 2004.
S&P STARS* Rank
Catalog Retail/Consumer Discretionary
Insight Enterprises (NSIT)
Computer & Electronics Retail/Consumer Discretionary
Best Buy (BBY)
Computer Storage & Peripherals/Info. Tech.
Storage Technology (STK)
Consumer Electronics/Consumer Discretionary
Harman International (HAR)
Diversified Metals & Mining/Materials
Phelps Dodge (PD)
Newmont Mining (NEM)
D.R. Horton (DHI)
Internet Retail/Info. Tech.
Internet Software & Services/Info. Tech.
Office Electronics/Info. Tech.
* S&P's stock appreciation ranking system for the coming 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