Leaders and laggards: buy the best, not the cheapest

In every market rally, a small group of stocks does most of the work. They tend to come from a handful of strong industries. Your job is to find those leaders, not the stocks that look like bargains.

Lesson 40 of 76 · 2 min read

Strong stocks travel in groups

Big money rarely buys just one company. When funds get excited about an industry, they buy several of its best stocks. That is why winners tend to cluster: a strong group lifts its members, and a weak group drags even good companies down.

Research popularized by William O'Neil found that a large share of the biggest winners came from industries that were themselves among the market leaders. Checking the group is a simple way to put the odds on your side.

Group rank on the platform

The platform sorts stocks into industry groups based on GICS sub-industries, the standard classification used across the market. Each group is ranked by the RS Ratings of its stocks. Rank 1 is the strongest group.

The group rank appears in each chart's data box. On the Groups page you can see the full ranking, which groups are rising and which are falling. Many traders focus on stocks from groups in the top 20% to 40% of the list.

Buy the leader, not the laggard

Inside a strong group, one or two stocks usually lead: the best earnings growth, the highest RS Rating, an RS line at new highs and the cleanest base. Others lag behind.

Beginners are often tempted by the laggard. It has gone up less, so it looks cheaper and seems to have more room to catch up. In practice it usually lags for a reason: weaker sales, thinner margins or less fund interest. When the group cools off, laggards often fall first and hardest.

A $200 leader is not more expensive than a $20 laggard in any useful sense. What matters is how the business and the stock are performing.

• Compare the RS Rating of each stock in the group.
• Check which RS line is making new highs.
• Look at quarterly earnings and sales growth.
• Prefer the stock with the cleanest base near its pivot.

Sector rotation

Leadership does not stay in one place forever. Money rotates between sectors as the economy and interest rates change. Technology might lead for a year, then energy or industrials take over.

The sector rotation chart on the Groups page shows which sectors are gaining and losing relative strength. When a new sector starts climbing in the ranking, look inside it for stocks forming bases. When your group starts sliding, be more careful with new buys there.

Open Industry groups → Try it on Ticker&Tape