WiserTrader Monthly

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July 2007                          Prescott, Arizona                     Contact Editor

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Contents

Sample Correlation Coefficient

1.0 Leading Industries

Stocks in Leading Industries

Performance of Last Month’s Leaders

2.0 Industries Rising in Rank

3.0 Industries Falling in Rank

4.0 Lagging Industries

Published the 3^rd Tuesday of the month

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Financial markets are an emotional place.  Without a feel for market sentiment, anyone can fall victim to the stressful emotions that make 90% of all trades lose money at precisely the worst possible moment.  For those in long positions, positive financial news is met with greed or complacency while negative news is met with caution or fear.  For those in short positions, the opposite is true.  Changes from one mode to the other are signaled by large swings in the VIX, VXN and put-call ratios.  However, when market news is inconclusive, it is accompanied by uncertainty, indecisiveness and continuous volatility.  This turbulent condition is signaled when stock and industry price movements are highly correlated with the major averages. 

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Sample Correlation Coefficient

     Some of the best sentiment indicators depend on polling investors, brokers, traders, money managers, hedge fund managers, technical and fundamental analysts, and very savvy market players, each with their own particular expertise in the markets.  It is the equivalent to the perfect market diversification, only in terms of backgrounds, interests, and approaches.  Financial news commentators who actually seek opinions from to floor traders are also worth listening to.  A very curious oscillatory condition occurs when market participants are uncertain.  The market will move sideways in a choppy fashion as stocks follow the major indices very closely.  It is as if everyone is watching everyone else because maybe someone else knows what’s going on!  Stocks and industries follow the major averages very closely with a high degree of correlation.

     The When the correlation between industries, stocks and the major averages is perfect the correlation coefficient equals 1.  When they are perfectly out of sync, the correlation coefficient is -1.  This can be expressed as a percentage from -100% to +100%.  One way to measure the correlation between stocks, industries and the major averages is to compare their William-%R values over a number of days.  This avoids comparing very large price values say for the DOW, with a variety of large and small numbers for stocks and industry composite values.  Such comparisons are thus restricted to values ranging from 0 to -100. 

     One must be consistent in the choice of the number of days, the period for which the indicator is measured and also the kind of comparison being made.  In this work, the 10-period Williams-%R is compared over 11 days.  That means 11 pairs of values are compared (11 for a stock or industry and 11 for the major averages).  Ideally, it is best to use a William-%R period that is about half the periodic cycle.  The 10-period Williams-%R is arbitrarily chosen in order to make a consistent comparison.  Eleven days worth of data was chosen to fully encompass all the Williams-%R data for the pervious day.  When calculating the correlation with the major averages, one can either (1) calculate it for each stock or industry and then combine the correlations into an average value or (2) average the Williams-%R values for the stocks or industries and then calculate the correlation based on the averages.  The first method gives a wider range of values that averages around 35% or less when the markets are calm and rising to 40% to 80% when the markets are highly volatile.  The second method produces a consistently high value over a much narrower range.  Therefore the first method is used in order to obtain a wider dynamic range of values.

     Over the past month the 215 industry correlation with the major averages has ranged from 40% to 65% while the market has been extremely volatile, swinging back and forth every two weeks or so.  As of this writing the industry correlation coefficient is about 36%, still a little on the volatile side.

     Formally, the correlation coefficient is actually being approximated by taking a biased sample.  We do not perform a test of significance or construct a confidence interval.  We are making only a relative comparison.  Hence it is called the sample correlation coefficient for two samples if data x and y.  Let us suppose that the n = 11 Williams-%R values for stocks or industries are represented by sample x and n = 11 William percent-%R values for the major averages are represented by sample y.  Then the sample correlation coefficient r is given by, *

Where,

* Irwin Miller, “Probability and Statistics for Engineers”, Prentice Hall, Englewood Cliff, NJ, 1977

     This calculation is installed in the industries spreadsheet for the correlation between 215 industries and the major averages (DOW, NASDAQ Composite, S&P 500, Russell 2000 and NYSE Composite).  

Stock Picks by Industry Ranking

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Top down stock picking based on the leading stocks in leading industries should be supplemented with additional fundamental and chart analysis.

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1.0 Leading Industries

     About 90% of an industry’s rank is weighted by the percent increase in its index price over the previous 4 weeks and 10% is weighted by how much the index is oversold based on its 10-period Williams-%R.  Industry rank ranges from a high of 1 to a low of 215 based on a list of 215 industries in the Yahoo Finance industry classification system. 

     The main reason for using this classification system is the ready availability of industry performance.  Each industry’s performance is accessible through online data retrieval software that imports the numbers directly from Yahoo Finance and sorts them in a spreadsheet.  These tools are available on the website.

     The leading industries for the past month are ranked in Table 1A.  The leftmost column is the rank.  The second column from the left is the number of positions an industry is above or below its 4-week average rank.  The third column from the left is the relative rank of the industry based its movement above its average rank.  Clicking on the industry name takes you to an industry summary page.  The “C’s” will display the companies in the industry.  The last three columns on the right are the percentage gains for the previous trading day, the previous week and the previous four weeks. 

 Table 1A

Leading Industries

July 16, 2007

Rank	Relative To Avg. Position	Rank of Position  Change	Industries	Companies	Last Gain	1 wk Ago Gain	1 mo Gain
1	63	16	Aluminum	C's	0.0%	9.5%	13.8%
2	7	92	Copper	C's	0.0%	6.0%	12.1%
3	9	86	Personal Computers	C's	0.0%	3.6%	11.9%
4	23	60	Semiconductor- Memory Chips	C's	0.0%	2.4%	10.9%
5	81	9	Nonmetallic Mineral Mining	C's	0.0%	5.2%	10.4%
6	35	40	Networking & Communication Devices	C's	0.0%	4.5%	10.3%
7	25	55	Industrial Equipment Wholesale	C's	0.0%	-1.0%	10.0%
8	-2	115	Semiconductor - Specialized	C's	0.0%	0.4%	9.7%
9	-6	124	Synthetics	C's	0.0%	0.7%	9.7%
10	4	97	Heavy Construction	C's	0.0%	1.7%	9.5%
11	52	26	Industrial Electrical Equipment	C's	0.0%	2.9%	9.2%
12	23	63	Internet Information Providers	C's	0.0%	1.3%	8.9%
13	39	37	Medical Practitioners	C's	0.0%	1.5%	8.9%
14	28	51	Education & Training Services	C's	0.0%	0.7%	8.8%
15	3	102	Semiconductor - Broad Line	C's	0.0%	3.0%	8.8%
16	-7	128	Industrial Metals & Minerals	C's	0.0%	-0.8%	8.7%
17	105	6	Jewelry Stores	C's	0.0%	2.4%	8.4%
18	41	34	Diversified Communication Services	C's	0.0%	1.1%	8.1%
19	39	36	Auto Parts	C's	0.0%	3.3%	7.7%
20	10	84	Major Integrated Oil & Gas	C's	0.0%	1.0%	7.4%
21	72	12	Shipping	C's	0.0%	0.3%	7.3%
22	80	10	Trucks & Other Vehicles	C's	0.0%	4.6%	7.1%
23	7	90	Scientific & Technical Instruments	C's	0.0%	1.8%	6.9%
24	70	14	Silver	C's	0.0%	0.4%	6.9%
25	-9	130	Agricultural Chemicals	C's	0.0%	1.2%	6.9%
26	53	24	Technical Services	C's	0.0%	3.9%	6.7%
27	99	7	Semiconductor - Integrated Circuits	C's	0.0%	0.1%	6.7%
28	-1	110	Wireless Communications	C's	0.0%	1.0%	6.6%
29	43	33	Lodging	C's	0.0%	-2.0%	6.6%
30	68	15	Foreign Money Center Banks	C's	0.0%	4.1%	6.6%
31	29	48	Conglomerates	C's	0.0%	3.9%	6.3%
32	8	87	Data Storage Devices	C's	0.0%	0.8%	5.9%
33	53	22	REIT - Hotel/Motel	C's	0.0%	-2.6%	5.7%
34	45	32	Printed Circuit Boards	C's	0.0%	3.6%	5.7%
35	114	5	Dairy Products	C's	0.0%	1.8%	5.7%
36	27	52	Meat Products	C's	0.0%	1.6%	5.6%
37	4	99	Farm & Construction Machinery	C's	0.0%	4.3%	5.5%
38	10	81	Telecom Services - Foreign	C's	0.0%	1.0%	5.5%
39	-2	116	Steel & Iron	C's	0.0%	0.4%	5.3%
40	16	73	Consumer Services	C's	0.0%	0.9%	5.3%

     The top 20 leading industries are plotted in Figure 1.

FIGURE 1

1.1 Stocks in Leading Industries

     The two leading industries for the past four weeks were Aluminum and Copper.  Stocks from these are listed according to their past week’s percentage gain in Tables 1B and 1C.  Leaders for the past week and month have the lowest numbered rankings.  Some stocks were omitted because data was difficult to obtain.

Table 1B - Aluminum

Symbol	Exchange	Avg. Vol.	Volume	Price	Last % Chg	1wk %Chg	1mo %Chg	1 wk Rank	1 mo Rank
AL	NYSE	4,598,650	9,902,598	$96.94	-0.57%	11.5%	17.0%	1	2
AA	NYSE	13,732,200	27,708,372	$46.77	-1.22%	10.4%	12.4%	2	3
CENX	NasdaqNM	755,961	699,540	$64.19	-2.30%	7.1%	17.8%	3	1
NX	NYSE	424,426	513,900	$53.53	-1.16%	5.8%	7.1%	4	6
SPSX	NasdaqNM	182,679	109,097	$39.41	-1.10%	1.0%	8.7%	5	5
ACH	NYSE	830,327	859,900	$47.75	0.38%	0.5%	12.3%	6	4
MXM	AMEX	1,256	1,100	$28.25	-1.50%	-0.1%	-0.2%	7	8
KALU	NGM	188,717	175,013	$75.80	-3.14%	-2.3%	0.7%	8	7
TG	NYSE	200,423	174,900	$20.77	-3.89%	-3.8%	-6.4%	9	9
CMQ	AMEX	30,912	18,300	$0.43	-2.27%	-6.5%	-10.4%	10	10

Table 1C – Copper

Symbol	Exchange	Avg. Vol.	Volume	Price	Last % Chg	1wk %Chg	1mo %Chg	1 wk Rank	1 mo Rank
TNRO.OB	OTC BB	116,800	864,936	$2.02	42.25%	88.8%	152.5%	1	1
PCU	NYSE	2,024,460	1,651,154	$109.59	-0.57%	6.1%	17.2%	2	2
FCX	NYSE	9,516,560	6,908,044	$92.94	-1.38%	4.9%	10.5%	3	5
WIRE	NasdaqNM	386,661	240,697	$31.14	-0.13%	3.1%	3.9%	4	7
TGB	AMEX	1,151,310	1,449,754	$4.35	-0.68%	2.6%	16.0%	5	3
OLN	NYSE	1,160,030	865,600	$22.06	-0.36%	0.6%	9.8%	6	6
CUP	AMEX	1,355,340	989,600	$6.18	0.32%	0.2%	2.3%	7	8
MAD	NYSE	15,852	11,900	$15.61	1.36%	-1.6%	12.1%	8	4

     Symbols that are highlighted in blue are optionable.  Normally, the Options Advisory limits itself to stocks priced above $30 because the higher a stock’s price, the smaller percentage change is needed to produce a desired change in the value of an options contract.

     Before trading any of these stocks, some due diligence is needed to look at their charts and the fundamentals that you typically use.  These tables were obtained with tools available on the website, as well.  The tools can be used to produce similar tables for any or all of the 215 industries.

1.2 Performance of Last Month’s Leaders

     To show that this is not just an academic exercise, let us see how stocks in last month’s leading industry performed.  Last month we found that the synthetics industry was the leader for the previous month.  The percentage performance of non-over the counter stocks is given in Table 1D

Table 1D

Synthetics Industry Stock

Performance from June to July

ALB	5%
CCC	12%
CMP	2%
GGC	17%
HUN	33%
IFF	3%
LNDC	4%
NCX	13%
NLC	-7%
POL	27%
PONR	1%
PX	5%
RHA	3%
ROC	15%
TRX	-8%
WLM	6%

2.0 Industries Rising in Rank

     Table 2A contains the industries that are moving up in position the fastest.  The 20 fastest rising in rank are plotted in Figure 2.

 Table 2A

Industries Advancing in Rank the Fastest

July 16, 2007

Rank	Relative To Avg. Position	Rank of Position  Change	Industries	Companies	Last Gain	1 wk Ago Gain	1 mo Gain
46	140	1	Computer Based Systems	C's	0.0%	1.6%	4.8%
52	136	2	Wholesale, Other	C's	0.0%	0.7%	4.5%
43	134	3	Internet Service Providers	C's	0.0%	0.8%	5.1%
74	122	4	Broadcasting - Radio	C's	0.0%	0.5%	2.9%
35	114	5	Dairy Products	C's	0.0%	1.8%	5.7%
17	105	6	Jewelry Stores	C's	0.0%	2.4%	8.4%
27	99	7	Semiconductor - Integrated Circuits	C's	0.0%	0.1%	6.7%
61	89	8	Research Services	C's	0.0%	-0.4%	3.9%
5	81	9	Nonmetallic Mineral Mining	C's	0.0%	5.2%	10.4%
22	80	10	Trucks & Other Vehicles	C's	0.0%	4.6%	7.1%
103	75	11	Computers Wholesale	C's	0.0%	-0.2%	1.7%
21	72	12	Shipping	C's	0.0%	0.3%	7.3%
53	71	13	Publishing - Periodicals	C's	0.0%	4.5%	4.4%
24	70	14	Silver	C's	0.0%	0.4%	6.9%
30	68	15	Foreign Money Center Banks	C's	0.0%	4.1%	6.6%
1	63	16	Aluminum	C's	0.0%	9.5%	13.8%
45	61	17	Waste Management	C's	0.0%	2.2%	4.9%
48	60	18	Foreign Regional Banks	C's	0.0%	3.1%	4.6%
143	60	19	Security Software & Services	C's	0.0%	0.5%	-0.3%
73	57	20	Electric Utilities	C's	0.0%	1.4%	3.0%
77	56	21	Asset Management	C's	0.0%	1.0%	2.8%
33	53	22	REIT - Hotel/Motel	C's	0.0%	-2.6%	5.7%
93	53	23	Railroads	C's	0.0%	3.3%	2.1%
26	53	24	Technical Services	C's	0.0%	3.9%	6.7%
94	52	25	Drug Manufacturers - Major	C's	0.0%	2.0%	2.1%
11	52	26	Industrial Electrical Equipment	C's	0.0%	2.9%	9.2%
51	52	27	Major Airlines	C's	0.0%	-1.3%	4.5%
76	50	28	Trucking	C's	0.0%	0.7%	2.9%
69	47	29	Gold	C's	0.0%	0.7%	3.2%
150	47	30	Movie Production, Theaters	C's	0.0%	1.4%	-0.5%
128	45	31	Computer Peripherals	C's	0.0%	-0.3%	0.7%
34	45	32	Printed Circuit Boards	C's	0.0%	3.6%	5.7%
29	43	33	Lodging	C's	0.0%	-2.0%	6.6%
18	41	34	Diversified Communication Services	C's	0.0%	1.1%	8.1%
56	41	35	Diversified Computer Systems	C's	0.0%	2.1%	4.1%
19	39	36	Auto Parts	C's	0.0%	3.3%	7.7%
13	39	37	Medical Practitioners	C's	0.0%	1.5%	8.9%
41	37	38	Closed-End Fund - Foreign	C's	0.0%	0.9%	5.2%
155	37	39	Multimedia & Graphics Software	C's	0.0%	-1.2%	-0.8%
6	35	40	Networking & Communication Devices	C's	0.0%	4.5%	10.3%

FIGURE 2

3.0 Industries Falling in Rank

     A list of the industries declining in rank the fastest is given in Table 3A.  The 20 fastest declining in rank are plotted in Figure 3.

 Table 3A

Industries Declining in Rank the Fastest

July 16, 2007

Rank	Relative To Avg. Position	Rank of Position  Change	Industries	Companies	Last Gain	1 wk Ago Gain	1 mo Gain
171	-39	176	Accident & Health Insurance	C's	0.0%	-0.3%	-1.5%
122	-40	177	Oil & Gas Refining & Marketing	C's	0.0%	-0.2%	1.0%
191	-40	178	Property Management	C's	0.0%	-1.0%	-3.4%
193	-41	179	Specialty Retail, Other	C's	0.0%	-0.8%	-3.5%
202	-41	180	General Entertainment	C's	0.0%	-1.0%	-5.4%
147	-42	181	Electronics Wholesale	C's	0.0%	-0.3%	-0.5%
205	-42	182	Department Stores	C's	0.0%	-3.0%	-6.2%
153	-44	183	Property & Casualty Insurance	C's	0.0%	-0.8%	-0.6%
139	-44	184	Discount, Variety Stores	C's	0.0%	1.3%	0.1%
130	-44	185	Appliances	C's	0.0%	0.0%	0.5%
172	-45	186	Closed-End Fund - Debt	C's	0.0%	-1.6%	-1.7%
190	-45	187	Recreational Goods, Other	C's	0.0%	-1.4%	-3.3%
133	-46	188	Application Software	C's	0.0%	0.9%	0.3%
151	-47	189	Drug Delivery	C's	0.0%	-1.5%	-0.5%
92	-48	190	Oil & Gas Equipment & Services	C's	0.0%	0.2%	2.2%
179	-50	191	Regional - Mid-Atlantic Banks	C's	0.0%	-0.3%	-2.5%
114	-52	192	Rental & Leasing Services	C's	0.0%	-1.2%	1.4%
137	-52	193	Cement	C's	0.0%	-1.2%	0.3%
199	-54	195	Credit Services	C's	0.0%	-2.7%	-4.3%
158	-54	194	Building Materials Wholesale	C's	0.0%	-1.4%	-0.9%
71	-56	196	Home Health Care	C's	0.0%	0.2%	3.1%
188	-59	197	Long-Term Care Facilities	C's	0.0%	-0.4%	-3.0%
97	-59	198	Hospitals	C's	0.0%	0.8%	1.9%
79	-59	199	Medical Laboratories & Research	C's	0.0%	-0.1%	2.8%
165	-61	200	Electronics Stores	C's	0.0%	-3.6%	-1.2%
174	-61	201	Sporting Activities	C's	0.0%	-3.5%	-2.0%
136	-66	202	Diversified Electronics	C's	0.0%	0.5%	0.3%
162	-70	203	Regional - Southwest Banks	C's	0.0%	-0.6%	-1.1%
144	-73	204	Business Software & Services	C's	0.0%	-0.1%	-0.3%
198	-83	205	General Contractors	C's	0.0%	-4.5%	-4.3%
160	-87	206	Independent Oil & Gas	C's	0.0%	-0.3%	-1.1%
173	-88	207	Processing Systems & Products	C's	0.0%	0.2%	-1.9%
148	-91	208	Drug Manufacturers - Other	C's	0.0%	1.3%	-0.5%
170	-95	209	Electronic Equipment	C's	0.0%	-0.5%	-1.5%
194	-97	210	Auto Parts Stores	C's	0.0%	-3.5%	-3.5%
213	-104	211	Oil & Gas Drilling & Exploration	C's	0.0%	-0.3%	-10.1%
131	-108	212	Sporting Goods	C's	0.0%	-0.4%	0.5%
180	-119	213	Regional - Pacific Banks	C's	0.0%	-1.0%	-2.6%
167	-123	214	Technical & System Software	C's	0.0%	-0.6%	-1.3%
201	-169	215	Home Furnishing Stores	C's	0.0%	-1.0%	-5.1%

FIGURE 3

4.0 Lagging Industries

     Lagging industries for the past month are listed in Table 4A.  A chart showing the rank performance of the 20 worst ranked is shown in Figure 4.

 Table 4A

Lagging Industries

July 16, 2007

Rank	Relative To Avg. Position	Rank of Position  Change	Industries	Companies	Last Gain	1 wk Ago Gain	1 mo Gain
176	-26	160	Publishing - Newspapers	C's	0.0%	-0.5%	-2.4%
177	-19	146	Housewares & Accessories	C's	0.0%	-1.6%	-2.4%
178	5	94	Music & Video Stores	C's	0.0%	-3.4%	-2.4%
179	-50	191	Regional - Mid-Atlantic Banks	C's	0.0%	-0.3%	-2.5%
180	-119	213	Regional - Pacific Banks	C's	0.0%	-1.0%	-2.6%
181	10	85	Real Estate Development	C's	0.0%	-0.8%	-2.6%
182	-20	149	Regional - Midwest Banks	C's	0.0%	-0.2%	-2.7%
183	-7	126	REIT - Industrial	C's	0.0%	-0.4%	-2.7%
184	-35	173	Marketing Services	C's	0.0%	-0.6%	-2.9%
185	-21	152	REIT - Diversified	C's	0.0%	-1.9%	-2.9%
186	-17	141	REIT - Office	C's	0.0%	-1.4%	-2.9%
187	-37	174	Apparel Stores	C's	0.0%	-1.0%	-2.9%
188	-59	197	Long-Term Care Facilities	C's	0.0%	-0.4%	-3.0%
189	-20	148	Specialty Eateries	C's	0.0%	-0.3%	-3.1%
190	-45	187	Recreational Goods, Other	C's	0.0%	-1.4%	-3.3%
191	-40	178	Property Management