What makes stocks move? - Know your sectors!

Intro
In this post, I’ll cover how understanding sector strength can ease your security selection process and improve your trading returns. Furthermore, I’ll briefly touch on how a trader can use sector seasonality to devise trading strategies.

What makes stocks move?

According to Teeka Tiwari, more than 68% of what makes a stock go higher is sector-related. I would not question his observation because it is similar to Michael Parness' insights on 'Laggards.'

What is a laggard? When a stock's movement lags its industry/sector peers, the stock is considered a laggard. Such a price divergence frequently corrects itself when the lagging stock catches up with its peers.

The point is that a trader needs to be aware of sector strength. As I covered in my ‘Tradable Universe’ post, the greater the number of open positions, the more difficult it is to manage them. By determining the sectors you want to focus on, you narrow your tradable universe.


Know your Sectors!

Below are ticker symbols of key sector indices.

XNG: Natural Gas
RXH: Healthcare Prov
XCI: Computer Tech
RXP: Healthcare Prod
MSH: High-Tech
IIX: Internet
BTK: Biotech
XAU: Gold & Silver
UTY: Utilities
CMR: Consumer
DRG: Pharmaceutical
XTC: Telecom
BKX: Banking
XBD: Broker/Dealer
CYC: Cyclical
RMZ: Real Estate
SOX: Semiconductor
DJT: Transports
XOI: Oil

CLICK HERE TO VIEW COMPONENTS OF THESE SECTOR INDICES

Strategy:

Once you pick the sector you want to focus on, you can then determine the particular sector index component you wish to trade. If you rely on screening techniques for security selection, then MSN’s Deluxe Investment Finder is one of the best screening tools available.


AMEX Sector SPDRs

XLY: Consumer Discretionary SPDR
XLP: Consumer Staples SPDR
XLE: Energy SPDR
XLF: Financials SPDR
XLV: Health Care SPDR
XLI: Industrials SPDR
XLB: Materials SPDR
XLK: Technology SPDR
XLU: Utilities SPDR

Strategy:

Rather than analyzing individual stocks (sector index components), you may directly trade SPDRs. However, if you prefer trading individual stocks rather than ETFs, then you can select individual components of the ETF(s) of your choice just like I mentioned above.


Sector Seasonality

Sector seasonality has similar implications as sector/asset class rotation. Very simply put, at different times of the year, certain sectors are favored over the others because they are statistically more likely to give you greater returns. Sector seasonality was featured first in 1968. A Merrill Lynch study showed that buying seven sectors around September/October and selling in the first few months of 1954-1964 tripled the gains of holding them for those 10 years.

TO VIEW THE UPDATED SECTOR SEASONALITY CALENDAR, CLICK HERE.

Strategy:

The strategy should be fairly self explanatory.

1) Look at which sector is expected to be strong according to the Sector Seasonality Calendar.
2) Either select the Sector SPDR or sector components.
3) Buy long/Sell short depending on your expectations of sector strength.


Don't forget to visit my website at http://www.technicalanalysisbase.com/ and my other blog at http://technicalanalysisbase.blogspot.com/

Sanjeet Parab
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