An overview

A reader comments...

"You say often that now's the sort of time to review sectors. Get the sectors right, then look for the stocks. Would you offer a lesson on how one ought do this? Are these sectors pre-defined ones e.g., the Global Industry Classification Standard? Lots of institutions seem to have their own sector funds, ETF's and indices, but I imagine that not all taxonomies are equal. And what does one look for to decide that a sector is doing well? That it has shown strength in recent months? Do you apply similar techniques as with individual stocks, i.e., analyzing the chart of the sector index? An overview would be appreciated."

Your answer requires a lengthy reply; more time than I have right now. Too, over multiple posts, I have addressed this issue, albeit wholly unsuccessfully. (Note the continuing confusion.) Your request for an overview provides a good beginning to a new aproach.

Arguably the best display of group and sector performance is Daily Graphs Industry Groups, which is data heavy but visually rich. At a glance, you can see which groups are moving up or down, either quickly or molasses-like, and then home in on the group's component stocks, and see immediately the true leaders. There is an art to all this, and requires companion subscriptions, which are worth the money. (Especially if you prefer your data in visual form, as I do.)

In the graphic below, you will note the performance of a widely-accepted benchmark, the S&P 500 index...

[click on image to enlarge]
(c) Investors Business Daily

... Its specific rate of change matters little, however, because what you really seek is whether any given group or sector out-performs, or under-performs, the benchmark. Obviously, the Retail drug-store group out-performs on both an absolute and relative basis. And then there is CVS/CVS, the leader of the group itself; it out-performs both its group and the market, each by a massive margin. (I have mentioned CVS previously in these pages.) If I seek to purchase a leader based solely upon relative strength. then I just now have found a possibility deserving of additional investigation.

-- David M Gordon / The Deipnosophist