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We continue to see enquiries about sector based analysis, no doubt due because its value and the fact it is taught at a variety of seminars due to that value. With that in mind, this time 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 in.
Either way, the next step is to look at the economic sectors within the market. There are a swag of sector indices available for US stocks which are produced by various companies like Standard and Poors (S&P) and Dow Jones. While 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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While market scanning can be employed to analyze and compare the various sectors to highlight the strongest and weakest, there is such a small number 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.
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 quick way to find stocks that are in a given sector and also meet other criteria like a Wave 4 Buy or Safety in the Market ABC trade.
Figure 3 – 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 4 – Market Scan on Pre-computed Sectors
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Keep in mind also that 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 hits” so to speak.
Happy trading
Jordan Craw
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