The Tycoon Report

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I look at this every time I am doing anything associated with investing. This one visual gives me a host of information about these sectors.

Have Stock Buyers Had Their Fill of Restaurants?

Concentrating on our subjects for today, notice that the McCheese stands alone. Err, I mean, the restaurant sector is all by its lonesome on the far-right side of the chart (in the "overbought" section), in the 80% column. (Note that the chart says that a level above 68% is considered to be overbought.)

Another measure that's critical to investing and trading success is the NYSE Bullish Percent Index, which measures the percentage of NYSE stocks that exhibit bullish patterns on point-and-figure charts. The BPI is calculated by dividing the number of stocks with point-and-figure "Buy" signals by the number of stocks in a particular segment; the resulting percentage number indicates whether a segment is oversold (30% and lower) or overbought (70% and higher), similar to what is outlined in the chart above.

Looking again at the restaurant industry in the chart above, it has a Bullish Percent Index of at least 80%, which, if you followed my series on point-and-figure charting, tells us that at least 80% of the companies that comprise this subsector are on a point-and-figure "Buy" signal.

The chart above also tells us that the sector is in a column of Xs on that BPI chart (the plus-sign in the box signifies this).

Here's the sector BPI:
 

Notice the comet-like ascent in March and April to the current (as of April 27) to 86.21%. Also note that this is as high as this sector has been for the time line in this chart (i.e., since 1999).

What does that history tell us? That soon after reaching such a pinnacle, the sector takes a nosedive.

Time to Swoop in and Short the Sector?

With the restaurant sector so overbought, you may be asking yourself whether it's time to start shorting now ... is this the best time to go out and buy loads of put options?

To that, I say, "No way, Jorge!" There's no telling how long a sector will remain overbought. It can be weeks, months or even years.

Granted, in the restaurant chart above, the first dive took place over a three-month period, after hanging out at the high for two months (first circle). The second dive also took place about two months after the peak (discounting the up-and-down burp), and then moved downward in fits and starts for the next five months (second circle).

I'm going to wait until I get a signal from Sector Hunter. (This is what is was designed for, folks.) When there's a significant enough reversal from Xs to Os, that'll be the time to pull the trigger on this one. (Xs indicate a rising price; Os indicate a decline.) In the meantime, track your game.

Steel Industry in the Red Could Have You Making Green

Next up is the steel/iron sector. On the Industry Bell Curve, above you probably noticed that it's the only sector in RED.

It's also got a minus-sign, indicating that it's in a column of Os. Here she is:
 

It recently rallied to its last major resistance point (and by "major," I mean the one causing the longest tail ever, in December 2008), above the 70% mark. (This is a significant threshold.) But there, my friends, the story ends.

Well, OK, maybe it doesn't; there's no telling what could happen. The sector could reverse and head back up (and inevitably will).

But the history of the steel/iron chart tells me that, typically, once resistance is reached, it heads down, down, down. (The two exceptions took place in April 2008 and again in May, so keep your stop-losses on.)

In fact, Sector Hunter sent out an alert on the steel/iron sector on April 23, with four (count 'em, four) actionable trades. Since I'm familiar with this sector (those of you who've read my blog know that), I picked one of the trading opportunities listed and bought some put options the same day -- the very same put options recommended by Chris in his Trend Rider trade alert on the following day, April 24.

I'm not bragging about that coincidence. But I am bragging about the efficacy of the Sector Hunter system. It does work. My position's already up 8.5%. In four days.

And, if history is to be trusted, it's not too late to consider shorting this sector. I can't actually tell you to do so because I can't legally give you investment advice. ("I'm not an investment banker, but I've played one on TV.") But keep these potential plays in your back pocket to make profits on the way down ... and then again on the way back up.

Or better yet, get on our Sector Hunter waiting list and prepare to let this system do the work for you.