Providing investor education, product enhancements and software solutions on how to become a more successful trader & Understand the Stock Market with- THE INVESTRIO MENTOR CENTER Understanding the Stock Market The purpose of today's column is to provide you with invaluable insights into the Stock Market. Today’s Topic: SECTORS & INDUSTRIES In previous articles we focused on the importance of the Broader Markets and using indicators to decide when to get into or out of themarket. Remember, to be a smart investor, you don’t have to be in the market, you just need to know when to get in and out. Using trend indicators and the Moving Averages will assist you in determining the areas of strength in the market and help you minimize your risk. I mentioned in a previous article how much I love science, and talked about Sir Isaac Newton’s important discovery of gravity. Just like Newton, we start out with a simplified understanding of why an apple falls (or which direction the market is going) and then start analyzing the reasons behind it. Newton performed extensive tests to come to his conclusions. Just think how important our testing needs to be in the market, with its volatile nature and quick directional changes. We have talked about two tests that we can perform to analyze the market’s direction and understand more about the strength of the Trend. These are the Moving Averages and trend lines. Later we will get into some specific indicators that will give us “forecasts” of the Trends and entry and exit points, but for now let’s focus on analysis of the overall market. Once we start to understand the overall direction of the market, we can then start to focus in on specific areas within the driving force of the Broader Markets, such as Sectors and Industries. Once Newton began to understand the specifics of gravity, such as inertia, weight, and centrifugal force, he was able to apply specific tests to reach his conclusions. By using the sectors and industries, we can also start to find specific reasons for the rise and fall of an entire Broad Market, and get a picture as to why it may be performing as it is. Let’s start with Sectors. Sectors are groups of similar stocks within the Broad Markets. For instance, one of the sectors is semiconductors. This is a grouping of stocks that produce semiconductors, semiconductor equipment or are otherwise primarily engaged in the semiconductor industry. Other sectors include Internet, telecommunications, biotechs and many others. These groupings help delineate specific areas of strength or weakness within the Broader Markets. If the biotechs are the leading sector within the market you are following, you will want to give serious consideration to biotech stocks when considering your investment positions. To look at the sectors simply: Go to the tools menu Click on market trend Click on sectors Let’s try an example. We’ll assume that the oil sector is looking strong. The Trend is up, and the 20-day Moving Average has crossed the 50-day Moving Average on an upward direction. We have two supporting indications that this sector within the Broad Market is performing in your favor. Once you have this supporting evidence, what’s next? The next step would be to find out the Industries that are strong within the overall sector. Industries are groups of stocks within a sector that have a more narrow focus. For instance, within the oil sector you have oil drilling industries, pipelines, drilling equipment, oil field services, refineries and so on. You can look at the individual industries and find out which are the strongest and may be driving the sector. This is accomplished by: Going to tools Clicking on industry group information Clicking on best and worst Clicking on the correlated industry group associated with the sector This simple step-by-step process of looking at the Broad Markets, then the sectors and finally the industries, is essential when determining potential areas in which to invest. Remember, you don’t have to be in the market to be an investor. If none of the Broad Markets look favorable, don’t feel obligated to jump in. Remember, it’s your money. Once it’s lost, it is hard to gain back. So make smart decisions that will lower your risk. When the Broad Markets are down, it doesn’t mean there aren’t stocks that are performing well. It is possible to make money by buying stocks in a down market. But doing that successfully is like running in a stampede – it’s a lot easier to run with the bulls then against them! Following the process described in this article helps eliminate emotion and keeps you disciplined. This will allow you to find the direction of the bulls and run with them. |
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