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When Big Uptrend Starts, Seek Top Industry Groups

Third In A Series When the market enters a new uptrend, it's time to start looking for stocks to buy. But how

Two good places to start are the Research Tables (starting in today's IBD on Page B4) and the Industry Sub-Group Rankings table (on B9).

There are 33 sectors and 197 industry subgroups, so each sector contains many industry groups. The medical sector, for example, contains more than a dozen industry groups.

It may be tempting to look at beaten-down stocks in lagging sectors and industry groups, but it's the strongest sectors and groups that typically produce the most breakouts. In fact, IBD research shows that up to nearly half of a leading stock's strength derives from the strength of its sector and its .

The best stocks from the top five sectors and the top 40 industry groups typically have the best chance of success. Yet it's also a good idea to look at which sectors produce stocks identified as Sector Leaders, regardless of the sector's rank. And keep an eye on which groups and sectors are rising through the ranks.

Let's look at the market's follow-through on Dec. 20, 2011. (See Monday's Corner for more on the concept.) The office, apparel, aerospace, transport and insurance sectors were the leading sectors at the time, but none boasted any sector leaders boldfaced at the top of the sector listing.

Farther down the tables, the medical sector ranked at No. 19 out of 33. A few things made this sector compelling.

First, it contained more highlighted leaders — three — than any other sector. Alexion Pharmaceuticals (ALXN), Celgene (CELG) and Endo Pharmaceuticals (ENDP)  accounted for more than a quarter of the total sector leaders.

Next, all three happened to be in the Medical-Biomedical/Biotech industry group, which was ranked No. 15 at the start of the market uptrend.

Those who followed the stocks closely would have noticed that the biomedical group rose quickly, breaking into the top five by early January, about the time that Alexion and Celgene broke out of bases. The group's success aided the Medical Sector's gradual rise to seventh by mid-February.

Endo Pharmaceuticals never did break out, but careful observers would have noticed that it was soon replaced by Intuitive Surgical (ISRG). Its Medical-Systems/Equipment group was ranked No. 14 at the start of the market uptrend and rose to No. 4 by early January.

Alexion, Celgene and Intuitive Surgical went on to produce healthy returns, as the accompanying table shows.