Energy stocks are stumbling, fueled by oil production cuts from Russia and Saudi Arabia. The downward slide is bringing investor attention back to the cyclicals. But seasoned trader Mark Minervini cautions against buying into cyclicals, and says to focus instead on where to find winners in a market correction.
Cycling Out Of Energy Stocks
Minervini warns against buying into cyclicals — stocks that ebb and flow largely depending on commodity prices and other economic factors — in the hopes of capturing a market rally. "If you go back and look at where the biggest winning stocks came from, the big accelerating leading movers going back a hundred years, they don't come from these groups," said Minervini.
He says the biggest winners come from growth sectors like technology, retail, biotech, medicine and leisure, sectors that aren't heavily affected by swings in energy stocks or oil. "Oil prices aren't going to affect someone buying their iPhone," said Minervini. "That's why I tend to shy away from those areas as really investable."
Minervini also sees similarities between the semiconductor sector and energy stocks. "It's a very large group with lots of stocks," he says. "You can't make a sector decision on it [as it] can have a whole number of stocks that aren't doing well."
Don't Fear The Downturn
Minervini remains optimistic despite a poor showing from energy stocks and a pessimistic market outlook, and says it gives good stocks a chance to shine. "I love corrections, because that's where it becomes the easiest to spot the best names," said Minervini, who also says the opportunities "stick out like sore thumbs."
To spot opportunities in corrections, Minervini relies on basic tools in MarketSmith, using market indicators to determine the standouts. He runs a screen on stocks, filtering by using parameters that compare potential stocks against their peers. "It becomes the easiest to spot the best names because you look for those relative strength lines hitting new highs, look for the stocks holding up the best, the ones that accelerate fastest off the lows, break out first, and the ones holding up in bases," Minervini said.
He also relies on other indicators built into MarketSmith, like the RS Line blue dot, indicating a stock's relative strength line is hitting a 52-week high as the stock is building a chart pattern or breaking out. "The blue dots are great because those are the stocks that have the relative strength line making news highs coming from bases," said Minervini. "Most of the leaders will show up on that during corrections, so that's a good screen to run while you're in correction."
