Examining Sectors in a Different Time Frame

The next time frame we examine is the top formed in August 2005 (labeled Top 3 on Figure 7.1) and the October 2005 bottom (labeled Bottom 3 on Figure 7.1). The next top came in February 2006. Looking at Figure 7.7, we can see that the two sectors that retraced the least going into the October 2005 low were Gold & Silver and Brokers.

At the October 2005 low, the Gold & Silver sector was up about 15 percent and continued to rally to an increase of 60 percent, for a net gain of 45 percentage points from the October low. Brokers were up about 10 percent at the October low and continued to rally to post a gain of 40 percent, for a net increase from the October low of 30 percentage points.

FIGURE 7.7 Comparison of Sector Performance from the August 2005 High to the October 2005 Low

Source: Chart courtesy of StockCharts.com.

FIGURE 7.7 Comparison of Sector Performance from the August 2005 High to the October 2005 Low

Source: Chart courtesy of StockCharts.com.

By comparison, the S&P 500 was down about 3 percent at the October low, and then rallied to up 5 percent at the February 2006 high, for a net gain from the October low of about 8 percentage points. Therefore, the Gold & Silver and Brokers sectors outperformed the S&P 500 in this time frame by 400 percent or so. As this example clearly illustrates, by selecting the strongest sectors during a bull move, traders stand the best chance of being able to increase their returns significantly.

Focusing on Top Gold and Silver Stocks Figure 7.8 shows a comparison of 10 top gold and silver stocks, which are Freeport McMoran (FCX), Harmony Gold Mining (HMY), Silver Standard Resources (SSRI),

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