In the search for stock ideas and new market trends, it’s worth paying attention to the biggest moves at an industry sector level. Targeting sector leaders with positive price strength, hitting new highs on rising trading volume could put you on the trail of the market’s rising stars.
When it comes to using sectors in stock research, it’s worth considering how the classifications work and the ways investors can use them.
World stock markets and data suppliers classify equities by industry sector. Grouping stocks like this makes it easier to understand what they do, and makes comparisons between them more meaningful. There are 10 high level sector groups (11 in many parts of the world) which together account for more than 200 industry classifications.
Cyclicals | Sensitives | Defensives |
Basic Materials | Healthcare | Industrials |
Consumer Cyclicals | Consumer Defensives | Energy |
Financials | Utilities | Telecoms |
Real Estate (RoW) | Technology |
Modern portfolio theory will tell you that diversification helps to manage risk - and industry groupings are one way of doing that. Holding stocks across a range of industries can balance your exposure to different areas of the economy. Those groupings can guide you on the nature of the businesses - and how you might expect your holdings to behave in different economic and market conditions.
Generally, cyclical sectors do well in strong economic periods but suffer first and fastest when uncertainty reigns. Defensive sectors hold up better in spells of volatility and heightened uncertainty but can lag when the mood brightens.
But of course, not everyone puts the same value in diversification, often for good reason. At the other end of the spectrum are those who intentionally focus on very specific industry areas. They may have expertise or have worked in certain industries. They may have extensive research experience or just a particular interest. It may be that they’re just attracted to the returns that stocks in a sector have achieved in the past.
Indeed, many investors may not pay any attention at all to industry sectors when they pick stocks - and nothing says you have to. But one feature that’s common in the strategies of influential investors is that looking at what’s going on at a sector level can be useful…
How the investing greats think about sectors
For some famous investors - especially those chasing growth stocks - industry leadership is a must. Bill O’Neil, the American investor and publisher, devised a strategy he called CAN SLIM. The ‘L’…
