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Automobile Sector Looks Increasingly Constructive As 2017 Kicks Off

The stock market is undergoing a sector rotation. Technology stocks are underperforming as value stocks become leaders. The automobile sector is one of those outperforming sectors right now, and it has plenty of upside potential into 2017.

What we outlined above is an important insight for investors and traders. Picking specific market sectors and segment leaders is one of the few key success factors to outpeform the average investor. The issue most investors are facing is that their portfolio does not follow sector rotations; most investors tend to stick with sectors they are invested in, which makes them, to some extent, ‘blind’ to new trends.

Automobile sector: An enticing investment in 2017

As seen on the first chart, the Dow Jones Automobiles & Parts index, representing a large part of the automobile sector, has been trading in a sideways range for 3 years now. That is a very long period of time, for sure as the S&P500 has gone much higher in that  same period.

Visibly, the automobile sector has been a laggard in the last 3 years, without any doubt. As always, laggards become leaders at some point. The automobile sector seems to move from laggard to leader, as suggested by the breakout on the chart.

The chart pattern suggests it will be an attractive stock market sector in 2017, as part of our general bullish stock market outlook in 2017.

As a sector moves from lagging to leading, the key challenge for investors is to find the outperformers in the sector. We look at two specific automobile stocks: General Motors and Ford Motor.

Two automobile stocks revised

General Motors (symbol GM) has a chart pattern which is among the strongest in its sector. Last week, GM broke out from a descending trendline which connects the tops of 2013 and 2015. We will know that this breakout is for real as GM moves to all-time highs.

Furthemore, Ford Motor (F) is not really an outperformer at this point. This stock will only become attractive as it crosses $13.50, the falling trendline seen on the next chart.

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