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Which Sectors Will Benefit the Most From an Economic Recovery? |
June 25, 2009 By Nick Atkeson & Andrew Houghton, Editors of Big Money Options |
Houghton and Atkeson
Andrew Houghton and Nick Atkeson work together to identify options trading opportunities on the institutional level and, now, for OptionsZone.com readers. They are the editors of Big Money Options, an options trading service that provides one to two new opportunities each week based on their findings.
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The Power of Stock Price
Price is one of the most complete and objective sources of information about the condition of a stock and the market overall. If a stock is actively trading, the price is the point where buyer and seller demand is at equilibrium. That is, both buyers and sellers are willing to trade at that price at that time given all available information.
From the March 2009 lows, the major indices rallied about 40%, before pulling back last week. Still, the price of the market is clearly saying that the economic prospects of the U.S. appear much brighter today than they did three months ago.
Assuming the bounce was not driven entirely by short-covering and irrational exuberance, it appears our economy is in the process of returning to positive growth.
Before we take a look at the sectors that will likely benefit the most from an economic recovery and the top stocks within that sector, here's how a look at how we picked the winners.
Using Relative Strength to Pick Winning Stocks
In an effort to objectively identify the best-of-the-best economic recovery beneficiaries, we decided to use price as our indicator. Strong stock price performance is the quantification of the optimism market participants have for the future performance of the underlying company.
We ranked almost all stocks in the market by relative strength. The relative strength we used was a comparative look at the price of each stock relative to all of the other stocks in the market. In layman's terms, we wanted to find stocks that market participants believe have the brightest prospects as measured by their price.
Well, before the market started to bounce in March, several groups of stocks started to advance. Overall, the Russell 2000 (RUT), which is comprised of smaller cap stocks, led the pack.
Smaller capitalization stocks leading during a recovery is typical, as smaller companies have the most leverage to small changes in business fundamentals and are nimble and able to quickly position themselves to be in the path of the recovery.
NEXT: 3 Sectors Set to Benefit Most From an Economic Recovery
