Several years ago I was discussing market trading strategies with one of our most faithful clients. This gentleman was trading stocks before I was born. He witnessed the development of mutual funds and options markets. He mentioned that in his experience, the markets made many of their biggest gains in relatively short periods of seven to 14 days. Although this seasoned trader believed in the validity of being invested during long-term trends, he noted that even in sustained uptrends the markets would have short, steep advances.

I’ve never forgotten that observation, primarily because in the years since I’ve found it to be true. Partly as a result, when reviewing investments I normally consider both short and long-term performance. In most instances, funds I consider for investment will be among the leaders in short and longer-term performance.

Differences between long-term and short-term leaders can sometimes be an indication of economic changes that will result in a rotation among industry sectors. Recent weeks provide a good example.

Over the past month, the top sector ETF has been Merrill Lynch B2B Internet HOLDRS (BHH). It is up more than 14%. The telecommunications sector has also seen a recent surge and the top fund in that group, Merrill Lynch Telecom HOLDRS (TTH) is up more than 7% in that time. IShares Dow Jones Transportation Index Fund (IYT) has risen more than 6% in the past month and iShares MSCI - Brazil Index Fund (EWZ) is ahead by 5%. Given the recent weak market conditions, these are all respectable returns and many investors would put money in these funds based on their one-month gains. The chart below illustrates their performances since mid-January.

The red line is BHH. Notice that the bulk of its gain came in a three day period in January. Since then it has actually given back some returns. The other funds on the chart are TTH (green line), IYT (yellow line) and EWZ (purple line). Below are the same funds on a one-year chart. Obviously the longer perspective changes the picture. Now the top fund is EWZ, which has gained more than 70% over this period. But the gains were not always steady. There were sharp, short advances as well as some periods of correction. Now we can see that the past month has actually been a weak period for this fund and that it is still in a sustained advance. This would make it a good candidate for purchase.

Compare that to BHH, which is up 23% over the past year. While that seems like a good return, a glance at the red line shows that in addition to the three-day rally in January, the rest of its gains came during a sharp one-week rise in October 2005. The fund exhibits no sustained trend. Purchasing it at this point would appear to be nothing more than a gamble. There other two funds are a little more difficult to judge. Notice that the green line, TTH, has made a nice gain since mid-October.