This Week's Hottest Sector

Newton's law of inertia doesn't always work in the stock market. For example, the S&P 500 index has lost about 10% of its value since Dec. 31, yet oil companies -- for example, XTO Energy (NYSE: XTO) and Devon Energy (NYSE: DVN) -- are in the green on the back of record oil prices.

Insert dovetail here
Stocks in the same sector have a tendency to move in tandem, regardless of overall market conditions. After all, stocks in the same industry usually get their revenue from similar sources, and they're similarly affected by news, legislation, or events.

Each week, we'll take a look at the hottest sector over the past five days, according to SmartMoney.com's Sector Tracker. Then we'll cross-reference the individual equities against investor data on Motley Fool CAPS, the Fool's free investing community. CAPS can give us a better feel for what both individual and institutional investors say about these stocks.

A surprising sector
This week's top sector is Consumer Finance, up 7.0% in the past five days. This group includes:

Paying the bills
Consumer finance stocks, except for MasterCard, have been beaten down over the past year, as concerns about subprime mortgages, economic recession, and high consumer debt ratios mounted. In other words, investors doubted that Jill and Joe Investor could reliably pay down the mortgage, let alone the auto loans, credit cards, and other debts.

The past month has turned things around, however, as benefits from the economic stimulus package and tax refund season restore hope that consumers will be able to avoid default -- at least in the near term.

Nevertheless, on CAPS, investors are still concerned about the American consumer's ability to repay his or her bills.

One doubter is carbonates, who, in a September post on the Discover Financial page, said:

With the credit market tightening they are going into a very unfavorable business environment. I have noticed that they are trying to raise payment levels and interest rates on most of their borrowers, which will result in higher defaults, lower interest income from borrowers who do pay them off, and less usage by the most credit worthy borrowers. The only customers they will retain will be the bad ones.

On the American Express blog page, however, player sheycavinthinks AmEx's business model will help it weather the storm:

A very excellent business that doesn't require much capital and throws off loads of cash. Management uses this cash to buy back shares and pay an increasingly fat dividend. Thanks to an excellent rewards program, AmEx users spend more money than Visa, MC, or Discover users. This lets AmEx charge a higher transaction fee to merchants. Also, AmEx uses its own network to process these transactions so they make the money coming and going.

In this Fool's opinion, I'd stick only with consumer finance companies that engage in highly selective lending practices. Despite the forthcoming $600 stimulus package checks, most people owe far more than that on their credit cards and auto loans.

What really matters is if consumers can pay down their debts consistently, and not only during tax season. By lending only to those with a good credit history, these companies can avoid a subprime disaster.

What do you think? Was this week's surge the catalyst that will send consumer finance stocks soaring? Voice your opinion on Motley Fool CAPS, where more than 86,000 investors are waiting to hear what you have to say. It's 100% free to get started.