In order to become a consistently profitable trader, you have to know what types of stocks could outperform the market at any given moment.

While the market digests the massive rally that helped kick off the month of August, you have the perfect opportunity to scan for outperforming sectors. Once you know where to find the best performing stocks, you’ll be able to take advantage of the market’s next big move.

Today, I’m going to show you three different groups of stocks that have taken a leadership position during this rally. You can use this short list as a starting point when you begin to search for your ideal trading candidates.

Let’s get to it…

Strong Sector No.1: Energy

Energy prices have found renewed strength since the stock market started moving off its June lows. Now, energy names are pushing the S&P higher. The Energy Sector SPDR (NYSE:XLE) has outperformed the S&P 500 by a wide margin over the past four weeks, rising 7.75% compared to the S&P’s 3.4% rise.

Here’s XLE in action:

Note the double bottom in June (blue arrows) and the ensuing move that took out the May highs. Momentum is also increasing, as you can see from the up-trending RSI line below the price chart. After settling for lackluster performance for most of the year, energy names appear to be coming back strong as the summer begins to wind down…

Strong Sector No.2: Industrials

Much like energy stocks, industrial names are also showing newfound strength—with a couple of key differences.

Take a look at the Industrial Select Sector SPDR (NYSE:XLI):

First, there was no double bottom for industrials. Instead, we saw more of a “V” shaped recovery. But unlike our energy sector proxy, XLI has yet to top its early May highs. Still, industrials have outperformed the S&P 500 over the past month, rising a little more than 5% compared to the S&P’s 3.4% gain.

Also, take note of the rising RSI in this chart. Like energy stocks, momentum is increasing to the upside for these industrial names…

Strong Sector No.3: Technology

Technology rounds out our list at the third strong sector. This group of stocks is the only one on our list that has outperformed the S&P year-to-date.

Take a look at the Technology Select Sector SPDR (NYSE:XLK):

Tech stocks have not been as strong as energy names relative to the S&P over the past 4 weeks. But they do have much better performance looking back to January 1st. After topping its May highs early last week, XLK appears poised to attack 52-week highs sooner than energy or industrial names. And turning back to our momentum gauge at the bottom, you can see a similar rising trend line comparable to our other two sectors…

If you’re looking to ride the next leg of this market rally, these are definitely three sectors you can turn to during your search for winning trades.

Best,

Greg Guenthner

Related Posts

• December 10, 2012 -- 3 Strong Sectors for 2013
• January 22, 2013 -- 3 Tricks for Harnessing Market Momentum
• January 28, 2013 -- The Next Tradable Sector
• February 13, 2013 -- Dissecting This Recent Rally
• September 19, 2012 -- Three New Buying Opportunities for Gold

Greg Guenthner

Greg Guenthner, CMT, is the co-editor of STORM Signals and Penny Stock Fortunes. He is also the editor of Agora Financial’s Trend Playbook, a free resource for trend followers and technical traders. For close to a decade, Greg has led Agora Financial’s small-cap division, where he founded one of one of the only independent OTC research advisories in the industry. Greg specializes is classical trading techniques and combines timing strategies with his fundamental analysis of small-cap stocks.

He is a member of the Market Technicians Association and hold the Chartered Market Technician designation. 

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