How to Pick Stock by Sector

Buy Strength and Sell Weakness

The market adage "pick the best stocks in the best sectors" is sound financial advice. Understand that stocks exhibiting the same characteristics in sectors showing market strength will all generally rise. The remaining issue is the general credit health of the company and the quality of management. That is how you pick winning stocks in sectors.

Instructions

1. Pick stocks by choosing among the Standard and Poor stock sectors. Know that there are nine sectors used regardless of whether the stock is small cap (cap means capitalization---the number of shares outstanding times the stock price), mid-cap or large capitalization. Every stock listed in a sector will produce the same, similar or advanced technological versions of products used by the end customer. Related products and services are often put in the same sector.

2. Know that the nine sectors combine the entire universe of invested stock. The 10 sectors are utilities, energy, financial, health-care, consumer staples, consumer discretionary, industrial, materials and technology (see Resources).

3. Trade and invest in sector stocks through buying them individually after thorough research. Use fundamental analysis and credit research to highlight the best stocks in the sector of interest. Usual financial ratings and price earnings and other financial ratios. Understand why a sector is outperforming the rest of the market. This will give you insight into which company is best positioned to rise in price.

4. Trade exchange traded funds if you are not comfortable doing your own research and acting upon your conclusions. Exchange traded funds (ETFs) are passive investments containing most if not all stocks in any one sector. ETFs provide immediate diversification, and each stock in the fund is weighted by its market cap. This provides a true equal balancing of all stocks in the fund (see Resources).

5. Compute the closing weekly price of every sector ETF. Compute a four week moving average by subtracting the most recent price from the price four weeks earlier. Notice which sectors are moving up on a percentage basis. There will not be much volatility in the return. Stay invested by buying the top four sectors. Weight your purchases so that 30 percent of your money is in the top sector, 30 percent to the second sector, 25 to the third sector and 15 percent to the fourth.

Tips & Warnings

• Use exchange traded funds as long as your investable funds are under $50,000

• Always practice, or paper trade, before investing money in a new trading strategy.

References

• Yahoo Listing of Specific Stock Sectors

Resources

• S and P Sector Homepage