What is Stock Market Sector Analysis?
Stock market sector analysis is a top down stock selection method. Stock market sectors that are expected to outperform the rest of the market are identified, through methods such as the Relative Strength Comparison, and then stocks from those sectors are selected. The idea is that stocks selected from superior stock market sectors will perform in the same fashion as their sectors. This follows the principle that money generally flows from under-performing areas of the market to more profitable areas, a truth that has be tested by many traders.
"My studies have consistently shown that two equally bullish charts will perform far differently if one is from a bullish sector while the other breakout is in a bearish group. The favourable chart in the bullish group will often quickly advance 50 to 75 percent while the equally bullish chart in a bearish group may struggle to a 5 to 10 percent gain." - Secrets for Profiting in Bull and Bear Markets, Stan Weinstein, (McGraw-Hill 1992)
How can you use Stock Market Sector Analysis within MetaStock?
To identify stock market sectors that will outperform the market; you must first compare the strength of each sector against a chosen market index such as the S&P/ASX200 for the Australian market, or the Straits Times Index for Singapore. Once you've done this, you must rank the stock market sectors, and discover which ones are performing the strongest. After the strongest stock market sectors have been identified, you can see which securities are within the sectors. These individual securities can also be ranked against their respective stock market sector, which effectively allows you to single out the best performing stock market sectors.
The Relative Strength Comparison (RSC) is the best way to compare the strength of one security against a market index. The RSC compares a security's price change with that of a "base" or benchmark security.
When plotted on a chart, the RSC line can be interpreted as follows:
- An increasing RSC indicates that the security is performing better than the base security.
- A RSC that moves sideways indicates that both securities are performing the same.
- A decreasing RSC indicates that the security is performing more poorly than the base security.
It is important to note that just because the RSC may be rising in value, the security isn't necessarily rising in value as well. This rise only indicates that the security is performing better than the base security. For example, a security may be falling in price, but it may not be falling as fast as the base security. This would result in a rising RSC. Conversely, if the RSC is falling the security may not be reducing in value; instead it may be that it's price is increasing at a slower rate than the base security.
In the second and third sections of this article, you will learn how to use the various features of Metastock to calculate the RSC, and locate the best stock market sectors to choose securities from.
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