Stock Picking – Part 3: Factoring in Sectors and the Market

Part 3: Factoring in the Sectors and the Stock Market

Objective: To look at how a stock is performing in relation to its sector and the market.


Sectors

Many things can move the market. A major recession. An increase in interest rates. A major election. A major sector going up or down.

In the last couple of years, the oil sector took a big hit due to a saturated market with too many players getting greedy. A lot of the Canadian market is affected by oil because it’s one of our major commodities. So the Canadian market took a huge hit, along with our loonie. This impacted our businesses as it reduced our buying power outside Canada. Having said that, after being so down last year, we had a remarkable recovery and better performance than the US markets since January of this year.

Although the Canadian and US stock markets are different, I often check out the US stock market and sectors to give me an idea of the major trends going on in our part of the world. (I will definitely be looking at the US markets after the election results come out this November!)

The following is my list of sectors and industries that I like to examine. You may be more general or more specific as you can further categorize sectors by looking at the different industries that fall within them. I like to check these out from time to time to see if there are new opportunities, or if current opportunities look like they might run dry soon. Please note that this list doesn’t contain all the sectors and industries.

  • Utilities (XLU)
  • Consumer staples (food & beverages, cigarettes, household & personal care products) (XLP)
  • Healthcare (XLV)
  • Pharmaceuticals (PJP, XPH)
  • Transportation, shipping, and delivery services (IYT)
  • Financial (banking, lending services, and insurance) (XLF)
  • Retail (XRT)
  • Basic materials & construction (IYM)
  • Tech (XLK, AAPL, MSFT)
  • Energy (OIL, XOP, IYE )
  • Home building (XHB)
  • Gold (GLD, GG, AU, NEM)
  • Silver (SLV, SLW, AG/FR.TO)

The way I check out these sectors is by looking at their respective ETFs (exchange-traded funds) or the biggest stocks in those sectors, marked by the blue ticker symbols. If you’re not sure what an ETF is, that means you definitely haven’t yet read my book where I explain ETFs and indexes in easy-to-understand terms (Read it! The eBook is $2 right now!). I look at more than one ETF for some of the sectors.

You can create lists of any stocks you want to keep an eye on when you use freestockcharts.com. I have a list saved for sector ETFs. I can just easily go through my list on freestockcharts.com and check out the charts. Also, you can look up a sector by typing something like,”Retail etf,” anywhere on the screen in FreeStockCharts and a bunch of options will come up and you can select from the multiple options.

chart-1d

I apply the same principles when looking at the charts of each sector as I do stocks. I try to see if the sector has been hot for a while (well above the airplane) or if it’s just starting to warm up (at or below the airplane), or if it’s been quiet and moving sideways (along the runway). If a sector has been moving sideways and just starting to move up, I’m more interested in stocks that fall in that sector because it means there could be new opportunities to buy at lower prices. In investing, this is called “sector rotation.” If a sector is hot, I’ll wait for it and its stocks to cool off.

Remember the main M.O. of a savvy investor is to always look for new opportunities, not to follow a trend that’s far into its season.


The Stock Market

There is a lot of fear-mongering, even among savvy investors, with regards to stock picking and timing your investments with the market. It’s because people hate being wrong. No one wants to give wrong information. But for anyone who’s invested, you know you can be wrong for one month and then be right the next month and be well in the money. You can be right for one or two days and it’ll be months or, in rare cases, years before you’re in the money again.

It is hard to know exactly where the market is headed, but it’s easy to see where it’s been–to me, this is more important than making predictions. The way I see it, if it’s happened already, then you have something real to work with.

For the Canadian stock market, I look at these ETFs:

  • XIU (iShares X&P/TSX 60 Index)
  • XIC (iShares Canadian S&P/TSX Capped Composite Index)

For the US stock market, I look at these ETFs:

  • SPY (S&P 500 index)
  • DIA (SPDR Dow Jones Industrial Average)
  • QQQ (Nasdaq 100 Index)
  • IWM (Russell 2000 Index for smaller US companies)

I analyze the charts the same way I do for sectors and stocks on freestockcharts.com. I always compare stocks and sectors against the market. I ask these questions:

  • Is a stock lagging or leading its sector?
  • Is a stock lagging or leading its market (Canadian or US)?
  • Is a sector lagging or leading the markets?

My ideal situation: A sector trading on its own page

If the stock market is moving downwards (for the previous month or longer), but a sector has been moving sideways and is starting to heat up, it’s likely going to lead the market. I’ll be looking for stocks in that sector using the criteria I discussed in Stock Picking Part 1.

My less ideal situation: A sector trading like the market will be more affected by the market

If a sector’s chart looks just like the stock market’s chart over the previous month or more, it’ll likely be affected by the market, so if the market goes down, your sector will likely go down with it too. An individual stock better have an amazing chart (LONG sideways trading–we’re talking about a LONG RUNWAY lasting months!) for me to buy it without a stabilized sector behind it.

The situation I avoid: A sector in trouble

If a sector is weaker than the market and it has been heading down on its own, I’ll avoid it and any stock in that sector until I see the sector stabilize and trade sideways again.

I’m not that concerned with what the stock market is doing. In the past, I’ve been shaken out of some great opportunities because I was staring too hard at the market, trying to predict its next move. As soon as the market sells off just a little bit, I’d freak out and exit my positions, only to have the market recover after (as it always does since the beginning of stock market history). What is most important to me is how a stock is trading relative to its sector and how the sector is trading relative to the market. I’m always looking to get in early, not late after the party has already started.

________________________

I recognize this is advanced information. You really can buy stocks of companies that you like without ever having to look at a chart and do well. This is more about my swing trading strategies which for me, it has been a great way to make money.


When I look for stocks, I always look at their sectors and the market. I check to see whether a stock is leading or lagging its sector and whether the sector is leading or lagging the stock market. 

Is the idea of stock picking getting you down? You can still invest in stocks without having to pick one. Next time, I’ll get into ‘buying the market’ which is code for investing in ETFs!

2 thoughts on “Stock Picking – Part 3: Factoring in Sectors and the Market

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s