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We continue to see enquiries at Hubb about sector based analysis. No doubt due to the fact it is taught at a variety of seminars and of course because of the inherent value in doing sector analysis. With that in mind let’s take a look at how a top down approach can be employed.
In terms of the stock market, true top down analysis starts at an international level, looking for the country with the strongest potential stock movement. However for one reason or another, many investors will prefer to stick to investments (at least traded) within the country they live.
Either way, the next step is to look at the economic sectors within the market. There are an abundance of sector indices available for US stocks which are produced by various companies like Standard and Poors (S&P) and Dow Jones. Whilst there are some differences in category names and their components, most are quite similar. The Dow Jones (ICB) sector indices, listed in figure 1, match the classification method used by HUBB software for US Stocks and follow a straight forward symbol convention of DJUS - -.
Figure 1 – US Sector Index List
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For Australian stocks the S&P approach is the standard. These sector indices also follow a simple symbol convention, this time of X – J. In most cases the first letter of the name is the middle letter of the symbol.
Figure 2 – ASX Sector Index List
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Whilst market scanning can be employed to analyze and compare the various sectors to highlight the strongest and weakest, there is such a small number of sectors that often a manual process is just as easy. The main goal of course is to establish which sector is likely to perform the strongest over your investment time horizon. Whether this be done via technicals, fundamentals or an integrated approach, is up to you.
Figure 3 below shows an example of a sector index – ASX Information Technology – compared to the ASX Top 200. At time of writing, Info Tech is the best performing sector for 2010 – based on the Relative Strength Comparison Indicator.
Figure 3 – ASX Information Technology Sector
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Once sectors to focus on have been identified, the next step is to drill down into the individual stocks. The stocks within a sector can be found in all HUBB products via the ‘Nav Bar’. More information on this feature is available in the following article, Navigating Instruments.
Even more handy is Integrated Investor’s pre-computed sector lists as shown below in Figure 4. These combined with the pre-computed scan ‘List Intersection’ tool is an extremely effective way to find stocks that are in a given sector and also meet other criteria, such as Wave 4 Buy or Safety in the Market ABC trades.
Figure 4 – Pre-computed Sector Lists
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These pre-computed lists can also be used in the market scanner to build your own stock searches.
Figure 5 – Market Scan on Pre-computed Sectors
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A quick search of the Info Tech sector reveals Pie Networks (PIE:ASX) as its the strongest stock, up over 233% year to date. Of course looking for sectors and stocks with strong momentum is only one approach. The key, as always is to gain a view on future direction.
Figure 6 – Pie Networks
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A ‘Bottom Up’ approach can also be used – especially for other pre-computed scan results – to determine if a stock trade makes sense in terms of the bigger picture.
In any case, at this point the top down approach will have returned a number of potential trade/investment candidates and it is from here that “the rubber hits the road” so to speak.
For further information on The Integrated Investor Suite, visit www.hubb.com/ia
Happy Trading
Jordan Craw
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