Sector Watch

Over the past couple of trading days, I recommended to everyone to start shorting, going long puts, and using protective puts. I also outlines some basic methods for searching out good stocks to short / go long puts. Today, I’m going to go over sector performance.

For those of you unfamiliar with sectors, stocks are broken up into different categories. The highest level category is a sector. The sectors most people are familiar with are:

  1. Transportation
  2. Consumer Non-Cyclical
  3. Health care
  4. Conglomerates
  5. Technology
  6. Services
  7. Capital Goods
  8. Financial
  9. Consumer Cyclical
  10. Utilities
  11. Basic Materials
  12. Energy

Each sector is further broken into several Industry Groups. For instance, Energy is typically broken into the industry groups:

  1. Oil and Gas – Integrated
  2. Coal
  3. Oil Well Services & Equipment
  4. Oil and Gas Operations

The Value Of Tracking Sectors

By examining sectors as a large group of stocks, you can get a fairly decent view of the “big money flow.” What I mean by big mean is investment banks and mutual funds, the true driver of stock prices. Lets take a look at a list stock sectors and some performance information:

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stock sector list

There are a few key pieces of information I like to pay attention to when I look at this list.

  1. The ratio of new highs to new lows in the sector. Right now, the services sector is showing an 11 to 1 ration of new lows to new highs. This is a good indication that the services sector is getting hit hard, and could be ripe with stocks to short.
  2. RS (Relative Strength) Rank. This is the rank of each sector vs. every other sector. I actually keep a weekly log of these ranks. If you see a trend of a particular sector dropping in rank, that’s a sign that big money is moving out.
  3. 13-Week % vs S&P. This is a pretty simple measure of how each sector is performing against the entire market as a whole. Again, the best way to use this data is to track it over time. If you see a pattern of decline by a particular sector vs. the market, it is usually a good place to start shorting

Sector Rotation

All of the preceeding concepts are methods of tracking sector rotation. Sector rotation is the action of mutal fund and portfolio managers shifting assets from one sector of the economy to the other. These rotations are key indicators as to the state of the economy.

If you’re not familiar with sector rotation, investopedia has a great article about it.

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