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Buy Oversold Industries

Positioning one's portfolio in the most-hated sectors could lead to profits.
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Good investing is not rocket science. Buying high to sell higher sometimes works, but, over the long term, the big money is made by buying low to sell high. That's easy to say but tougher to implement psychologically. It requires going against the crowd.

Just 24 days ago, the S&P 500 was at its most oversold level in 14 months. Many traders that said they had been waiting for a pullback passed on the opportunity because media outlets were calling for a new 2008-magnitude decline.

We know now that Feb. 3, 2014, marked a great entry point. Generally oversold conditions led to terrific results. Superimposing a second criteria, scoping out and positioning in the most-hated industry group could have led to an even better rebound than that of the broad market.

What was the universally despised sector through early-February? Retail. Poorly performing stocks led talking heads to explain the bad price action rather than be embarassed by admitting that they had liked the shares.

I published the chart below in a Real Money Pro article three weeks ago to highlight the extremely beaten-up status of the group.

Traders who held their noses and bought shares of retailers or retail-associated ETFs did much better than simply owning the market. The non-levered SPDR S&P Retail ETF (XRT) was up 11.5% from the market's bottom through Wednesday, Feb. 26. Speculators who went for the 3x levered Direxion Daily Retail Bull 3X Shares (RETL) gained 28.2% in just 23 days.

You can find the current status of industry sentiment in every issue of Value Line. It appears in the "Selection and Opinion" section and lists trailing-six-week group share price performance of all companies in Value Line's 1700-company main research universe.

Below is what that showed as of the latest available period, dated Feb. 18, 2014.

There is no guarantee that out-of-favor groups will turn on a dime, but the chart provides a great starting point for researching stocks that may be bargains.

At the low point in March 2009, even the best-performing industry groups showed negative six-week numbers. That highlighted the most oversold condition in my 36 years of buying stocks.

At the time of publication, Paul Price had no positions in the stocks mentioned.