Welcome:   Lesson 5: Part 2 - Continued - Favored Sector Status This methodology is not an exact science, it is an art. What the methodology does is provide us with a very useful guide to the amount of risk we are taking on. Seldom do you ever have everything line up in your favor - that would be like being dealt a royal flush. Instead, what usually happens is we can clearly see that either the majority of indicators are stacked in our favor or out of favor and then make logical decisions from there. Let's look at a couple of situations that could arise as you are evaluating a sector and how you might approach the risk management. Using the table above, let's look an example of taking our analysis to the next level as we add in the Bullish Percent chart for the Oil Service sector and an individual stock situation. Setting the stage, the Oil Service sector is favored and the Bullish Percent chart for the sector is positive and has good field position. This would suggest that the sector has a whole is a place we would want to have exposure. Within that sector we'll say that Schlumberger (SLB) had strong relative strength versus both the market and the peer group so keeping the odds in our favor, we purchase SLB. Time passes, the sector does well as we expect and rallies above the 70% level. Now, the sector reverses down into O's from poor field position but the relative strength readings remain strong and have not waned. How might we handle the situation? On all measurements, the RS for the Oil Service group remains very strong. So if you owned SLB, instead of selling out the entire position, you would probably want to only trim the position, keeping some exposure in the group due to the strong RS reading of the sector. Other strategies like selling the stock and replacing it with a call could also work - any strategy that reduces but maintains exposure to the sector. Again, remember the concept is to outperform, and we think the best measurement for this is RS. Next