When you make the decision to invest in a stock, do you begin by analyzing the individual security, or do you start with a broader view? Market studies suggest that a stock's industry group and market sector are among the most important factors contributing to its return.

Stocks, like sheep, move in herds. If you want a sheep that is moving north, you had best pick a sheep in a herd moving north. There is always a chance your sheep may stray, but the odds favor putting your money on a sheep in a herd that's going your way. Another popular strategy is to identify a northbound herd and then pick the leader, or bellwether. This is the "strong stock in a strong group" approach used by so many professional investors and momentum players.

Groups and sector trends are especially important in the current environment with the "market" going nowhere and the small and mid-cap stocks taking the lead. Because one of the primary keys to successful stock selection is being right about your choice of industry, some of our recent work has focused on this area.

The stock market is more than a collection of individual stocks. Stocks tend to gather together naturally into business or industry groups. At Bollinger Capital Management, we have gone through more than 10,000 stocks to create a structure containing 4,200 stocks organized into 174 industry groups and 14 market sectors. We started with the traditional group structures but soon realized that it was very important to have a group structure that more accurately reflects the current market and the modern economy. So, we rebuilt from the ground up. Our Media and Yield sectors or Drug Delivery and IT Security groups are good examples of how we have modernized the traditional categorization.

What makes our approach uniquely useful is the manner in which specific stocks are assigned to industry groups. To determine the group structure, not only do we consider each company's generic business, but also its stock's trading pattern. Stocks not trading like their groups are placed in special non-correlated groups in each sector. As a result, our industry group structure is especially sensitive to market action. We call this a Rational Group Structure.

Rational industry groups tend to be "trendier" than individual stocks. In almost any market, some groups are rising and some falling. To take advantage of these trends, we rank the performance of our groups by front-weighted, short- and intermediate-term momentum measures. For a longer-term perspective, we look at persistency of money flow. These rankings form the core of Group Power.

Based on the information generated by our new industry group structure, we developed a system that takes market analysis to a new level. Everyday, we calculate advances and declines, up and down volume, based on groups. This not only allows the calculation of traditional market indicators, such as an Arms Index, but also creates a new and unique source for added market insight.

Another aspect of our macro analysis is the number of groups above and below their 10-, 50- and 200-day moving averages. Downturns in these numbers from high levels or after sustained advances and upturns from low levels or after sustained declines often mark important changes in trend. When these series move to extremes (over 90 or under 10) they are exceptionally good indicators of overbought/oversold market conditions for their time frames.

We also calculate 52-week new highs and new lows, which are widely used by momentum and relative strength players. However, we saw that we could gain an extra advantage, so we calculate 26-week and 13-week new highs and lows in addition to the 52-week lists. When a group shows up on the 13-week new highs list, it serves as an early warning; at that point, it is probably just emerging from a base. When it appears on the 26-week new highs list, we have a real advantage; we have a preview of what is going to hit the 52-week new highs list. Thus, we know in advance what the momentum/relative strength players will soon be focusing on. Of course, the same goes for the new lows list.

So, how do we use this analysis to select a stock? We like to use the metaphor of a rowing team. When all the oars are in sync, the scull shoots forward with power and grace. So, too, with equity analysis; the more factors going in favor of your trade, the more likely it is to be profitable. Ideally, you want to have the stock, group, sector and market all rising together when you buy or falling together when you sell.

Look first for a rising group ideally, one that has spent some time near the bottom of the list. Groups in the middle of the list are performing in line with the market as a whole. Those at the bottom of the list are severely under-performing. A transition from being at the bottom of the list to being above the middle of the list is a transition from underperformance toward being in favor. Therefore, when a group is working its way up from the bottom of the list, there is an excellent opportunity for strong gains as it draws attention and moves into favor. The second thing we look for in the industry group is good money flow and/or strong on-balance volume, in other words, strong technical indicators.

Once we have identified an attractive industry group, the next step is to review the technical condition of the individual stocks that make up the group. Momentum players will select the strongest stock in the pack. We are more conservative and look for a stock that is in good technical condition but is not very overextended.

Another factor we look for is consistency — for most of the stocks in the group to be confirming the upward move. When that happens, portfolio managers are interested in the group and are purchasing all the stocks in the group, which is like having one more rower pulling in our direction. We also like to see positive earnings revisions and that the analysts' opinions are improving, so the stock will have a lot of support.

Our industry group and market sector analysis is called Group Power, and it is available daily on eSignal. Group Power is designed to help investors make better investment decisions by providing incisive industry group analysis and powerful market timing tools. The service highlights where the action is, allowing you to focus your energies where the potential payoffs are the greatest.

Group Power is designed for investors who like to do their own analysis. If you are willing to do some work — a few minutes a day, 20 or 30 minutes a week — we believe Group Power can dramatically improve the odds of your being a successful investor.

John Bollinger, CFA, CMT, is best known as the originator of Bollinger Bands. Many investors are familiar with his work from market commentary on CNBC. He has published the Capital Growth Letter since 1988 and is President of Bollinger Capital Management, Inc. His book, Bollinger on Bollinger Bands was recently published by McGraw Hill. His websites are www.BollingerBands.com, www.EquityTrader.com and www.BollingerOnBollingerBands.com. Group Power is available from eSignal. For a free one-month trial contact 800.367.4670.