Page 186 - THE MARKET WHISPERER

182 PART 6 - Indices, Sectors And Crystal Balls

Sectors and Industries

So far, we have learned that 60% of price movement is influenced by the
market index (S&P 500) movement. But this is only partial information.
Of the remaining, 30% of the influence on movement is derived from the
movement of the sector to which the stock belongs. Only 10% of the time
will a stock “take itself into its own hands” and make its own way in the
market independently.

Stocks belong to industries, which together comprise a sector. The
financial sector, known simply as financials, is subdivided into four
industries: banks, various finance organizations, insurance companies,
and real estate companies.

Let’s assume you wish to buy a bank stock, such as Citigroup, symbol
C. We already know that the S&P 500 is responsible for 60% of stock
movement, so before you click “buy,” you would glance at the market
index and make sure it is trending up. Now I would ask you to also glance
at the chart for the industry to which the stock belongs: in this case, the
banking industry. I assume there is no need to remind you that during the
2008 Financial Crash and afterwards, banks were the weakest market
industry: in other words, the market index might be moving up, but the
banks dragged far behind, and may even have been trending down. A stock
belonging to an industry which is not functioning correctly will find itself
in difficulties even when the market is optimistic in general.

When you are about to buy a stock, first check to which industry it
belongs. This may take a few seconds before you reach a decision, but
they are definitely a few seconds well spent. Over time, you will come
to recognize most of the stocks and will not need to check each one’s
industry. For example, to which industry does TEVA Pharmaceuticals
(symbol: TEVA) belong? Drugs. To which industry does INTEL (symbol:
INTC) belong? Semiconductors. The next time you encounter these two,
for instance, you should be able to remember them. Within two to three
years, you should be fluent in the sectors for 70% of the stocks in which
you trade.