It has certainly been the most wonderful time of year this past month in the stock market with the Dow reaching new highs almost on a daily basis. Almost every sector of the market has been outperforming and many stocks are reaching all-time highs. Whenever you wake up in the morning and turn on your computer to see what the stock market is up to, the first question you should ask yourself is, “is it necessary to put on pants yet?” After you make that wise decision the second question you should ask is, “what is driving the markets today?” I have briefly touched on sectors in previous articles but if you are not familiar, sectors are simply the different industries that make up our economy. Here’s a list below:
- Consumer Discretionary
- Consumer staples
- Information technology
- Real Estate
- Telecommunication Services
Each sector is made up of all the stocks that are a part of that industry. Whenever I ask myself what’s driving the markets I take a top-down approach and look at the sectors to see which ones are overperforming and which ones are underperforming. Remember if the Dow is up 100 points there has got to be a certain sector that is driving that movement.
You can think of sectors being like reindeer that make up Santa’s sleigh (the stock market). There is going to be one reindeer that is leading the pack for that particular day in most cases. I know Rudolph should be guiding the sleigh but for the sake of this example, let’s just say he died maliciously in a hunting accident with the elves.
Why is my stock down today?
You may find yourself asking this question when your particular stock is down but there is no news surrounding why that might be. Stocks can be indirectly affected because of the other companies within the sector. Here’s some reasons an entire sector could be down which indirectly affects your stock within that sector:
- Negative Earnings Report from Another Company
o Big name companies within a sector can cause downside movement of other companies when they report bad earnings. Although the company makes its own profits, it still sells a similar products or services to its competitors and it can be interpreted that other companies will suffer the same result.
- New Government Regulation/Law/Bill
o Government laws can inhibit or enhance certain companies products and services. They can also increase or decrease demand for these items as well. For example, if the government passed a new law that required healthcare companies to lower drug cost, then those companies would suffer losses in revenues as a result.
- Economic event that increases/decreases supply
o Certain economic events occur that can directly affect supply and demand for a company’s products and services. A great example is a nature disaster such as a hurricane. The damage can cause in increase in demand for various construction and labor companies.
What’s the easiest way to look at different Sectors?
While you can google how different sectors are performing for the day and news surrounding them, the easiest way to check them out is with your trading platform. I don’t have the knowledge to say that every platform will have access to these tools but I’m going to show you were you can locate this information if you use TD’s ThinkorSwim or Schwab’s Streetsmart Edge because I consider myself an expert on those platforms. Let’s take a look at Street Smart Edge first:
Launch tools>Screener Plus >Performance By Sectors tab
As you can see a list of all the sectors populates. You can open each one up to see the sub-categories and then individual stocks within those sub-categories.
Now let’s look at Think or Swim:
MarketWatch>Quotes>By Industry >Select Industry
I personally like Streetsmart edge better because it shows the performance of the sector as an aggregate which allows you to get a good idea of how everything is performing immediately.
Why should I care?
I’ve already mentioned that it is good to know what is driving the market for the day so you can see what stocks might be underperforming or overperforming in the future. Another reason it’s good to be aware of sectors is because of diversification. In my time as a broker, I spoke with many clients who thought they had properly diversified their account because they bought 4 different stocks and were upset that all of them were down day after day. What they didn’t realize was that all of the stocks they owned were in the same sector so really, they weren’t that diversified at all.
In the article, There are so many stocks to invest in, where do I even start?, I mention that you should start your search for companies that you know and understand. If you work in a particular industry such as retail, healthcare, or utilities, you are going to have a heightened knowledge base on that particular sector as compared to the general population. You should focus your search for stocks within these sectors because you are involved in them on a daily basis.
Market Currently led by….
So far, we have seen a great surge in the Dow which has been led by the financial sector since Trump was elected. A combination of his election and the fed’s decision to raise interest rates has caused a rally across all stocks within that sector. What sector will continue to lead the Dow as we get close to crossing into 20,000 territory? It’s hard to be certain if that will continue to be financials or even the retail sector with it being the holiday season. If we keep up with the sectors on a daily basis we will begin to see trends on which sector might be outperforming. Sectors are cyclical just like the overall economy. If we understand what sectors are trending upward we can ultimately make better investment decisions.
Homework: Find a location where you can look at the various sectors on a daily or weekly basis. This does not have to be Think or Swim or Streetsmart edge but those are good resources to use and they are free!