An accurate Sector Analysis has been estimated to account for up to 80% of the price moves of individual stocks.
Ever wonder why your stock is going down in value while at the same time the broad market is increasing in value? If this has happened you might own a stock in the wrong sector. Sector Analysis might be able to keep you out of that situation.
Some short term differences in price direction vs the broad market should be expected. However, some seasoned traders and investors – including professionals – have estimated that as much as 80% of the price action – either up or down – can be attributed to the popularity of the stocks sector.
All the stocks trading in the US stock markets can be assigned to a specific sector. Think of a sector as a “grouping” of stocks that are essentially in the same business. Sector Analysis is a process that identifies which stock market sector is performing above average.
There are many companies that have split the stock market into their own divisions. Perhaps the most well known allocation has been defined by Standard & Poors.
Standard & Poors have split the market into 10 broad sectors. These sectors and the approximate percentage of the market allocated in each sector is shown in the table.
The S&P sectors are further subdivided into Industry Groups as shown in the following table. These 10 sectors and 24 industry groups are further broken down into 68 industries and 154 sub-industries into which S&P has categorized all major public companies. As you can see, Sector Analysis can be performed at many levels
Code
Sector
Subcode
Industry Groups
10
Energy
1010
Energy
15
Materials
1510
Materials
20
Industrials
2010
Capital Goods
2020
Commercial & Professional Services
2030
Transportation
25
Consumer Discretionary
2510
Automobiles and Components
2520
Consumer Durables and Apparel
2530
Consumer Services
2540
Media
2550
Retailing
30
Consumer Staples
3010
Food & Staples Retailing
3020
Food, Beverage & Tobacco
3030
Household & Personal Products
35
Health Care
3510
Health Care Equipment & Services
3520
Pharmaceuticals, Biotechnology & Life Sciences
40
Financials
4010
Banks
4020
Diversified Financials
4030
Insurance
4040
Real Estate
45
Information Technology
4510
Software & Services
4520
Technology Hardware & Equipment
4530
Semiconductors & Semiconductor Equipment
50
Telecommunication Services
5010
Telecommunication Services
55
Utilities
5510
Utilities
Although well known, S&P is not the only company to divide the stock market into sectors and industry groups. ValueLine, MorningStar, and many others divide the stock market up in different ways.
But don’t get hung up on which companies sector definition to follow. Sector Analysis is only designed to do one thing well – and that is to compare the performance of one stock- YOUR STOCK – to others in the same or similar business.
Sector Analysis prior to selecting what stock to buy is what is vitally important.
Profitable Investing uses the stock market sectors as defined by DorseyWright and Associates (DWA).
The sectors grouping that I prefer to follow are defined as:
1
Aerospace Airline
2
Autos & Parts
3
Banks
4
Biomedics/Genetics
5
Building
6
Business Products
7
Chemicals
8
Computers
9
Drugs
10
Electronics
11
Finance
12
Foods Beverages/Soap
13
Forest Prods/Paper
14
Gaming
15
Healthcare
16
Household Goods
17
Insurance
18
Internet
19
Leisure
20
Machinery and Tools
21
Media
22
Metals Non Ferrous
23
Oil
24
Oil Service
25
Precious Metals
26
Protection Safety Eq
27
Real Estate
28
Restaurants
29
Retailing
30
Savings & Loans
31
Semiconductors
32
Software
33
Steel/Iron
34
Telephone
35
Textiles / Apparel
36
Transports / Non Air
37
Utilities / Electri
38
Utilities / Gas
39
Wall Street
40
Waste Management
Within all the investing strategy decisions you’ll find on this web-site, I will be referring to this allocation and description of stock market sectors.
After we have digested the sector performance, we then select the top performers in that sector – these stocks become our buy candidates. We’ll always select the best performing stocks in the best performing sectors, in a market that’s trending upwards.
The overriding purpose for using stock market sectors and sector analysis is to compare the price performance of one stock to its peers in the same group.
So remember, Step 1 is to perform Stock Market Analysis, Step 2 is to perform Sector Analysis. Our goal is to own the best performing stocks in a strong sector, in a stock market that is increasing in value!
That’s a formula for profitable investing!
Sector Analysis References:
When I started refining how to perform sector analysis, I drew heavily from the information in two books. The first by Vincent Catalano titled Sectors and Styles offers an investment
technique that takes many economic factors into account when performing Sector Analysis. He illustrates how you should index a portion of your stock portfolio to the market, while investing another portion in industry sectors that are likely to outperform the broader market. To determine “hot” sectors, Catalano provides a framework for analyzing government activity, the economy, and market activity.
Another favorite sector analysis book is written by Timothy McIntosh entitled The Sector Strategist presenting a revolutionary new investment philosophy that redefines how we view sector investing.
For additional Sector Analysis information visit the Sector Analysis page.
