In the real estate market we have all heard that it is better to own the worst house on the best street rather than the best house on the worst street. The share market is no different. Under performing shares can be dragged up in price, as the perception by the public is that the stock is in a good sector of the economy. On the other hand strong companies can have their share price dragged down if they are in a poorly performing sector. I call this guilty by association and we only have to see the Tech Wreck syndrome of 2000 to see that point adequately proven. Most companies on the NASDAQ in the US took a hit from the market sentiment on IT companies even the heavy weights like Microsoft, IBM and Cisco Systems all fell on this set of symptoms.
So how do we assess the strength of a company within its sector? Well group sector analysis is the term. To make it easier I use the split screen function within my software to analyse the comparative performance. In this form of analysis, I am not saying I do not take trades that disagree with the broad sector view. What I am saying is when I can build a case where the sector weekly and daily trends are all in sympathy then the analysis in my view, is much stronger. If they are not all in sympathy this does not preclude me taking the trade, other factors then come into the analysis, to rate the strength of the trade. So firstly how would we find the strong sectors? I generally visually scan the indices, and use the split screen and overlay features within the Profitsource software. Looking at a split screen of some of the sectors, we can make a judgment using a simple moving average as to how the sector is trending.
The orange line represents a simple moving average and all charts are from March. We can see that apart from the materials and IT sector, all sectors are trending up. Let's focus on the XFJ, the financial sector and look at how individual stocks are performing against the index. In the case of St George Bank, SGB, we can see that its performance is in line with the movement of the index, suggesting that long trades are in overall sympathy with the index. There actually were a number of successful long trades on SGB at thsi time. Looking at Adelaide Bank, ADB, in comparison we can see that it has also been performing along with the index, recently though it has started to fall behind. Once again this would not preclude trades in my view. This information is allowing me to see the relative strength in comparison to other stocks and the index. Sector analysis can be a whole specialist course of study. Spending a few minutes looking at the stock in relation to the index may assist you in buying the right stock in the right sector. Please visit our site for more information: