Education & Information
Sector Analysis
There have been a number of studies that examine the cause of stock price movement. Every one of them concludes that the industry sector a stock is in is the single biggest influence on an individual stock’s price movement in that sector. In other words, the direction the sector is moving will have a major influence over the direction a stock within the sector will move.
Most investors that have been in the market for any length of time realize that stocks in the same sector tend to move in the same direction, however very few investors understand the extent of the sector and stock relationship. As well, most investors do not spend any meaningful amount of time analyzing sectors. They tend to spend their time analyzing individual companies attempting to find the next Microsoft or Dell Computer. That is like trying to find a needle in a haystack. You might be successful analyzing individual companies occasionally, but to be consistently successful, you have to be accurate on the sector analysis. If you are in the right sector, the individual stock selection becomes much easier.
Sector selection is taking on increasing importance to successful investment management. We identify sectors with positive cash flow and good strength relative to the overall market. By conducting our analysis with these two factors in mind, we can focus on those sectors that provide the lowest risk levels and the best opportunities and which high-risk sectors to avoid.
To study the cash flow (supply and demand) we use Sector Bullish Percent Charts. There is no better tool to help understand a sector’s supply and demand relationship. To study relative strength we use Sector Relative Strength Charts, which keep us focused on the strongest sectors. These two charts can provide a complete sector analysis necessary for successful investment management.