Sectors, Industry Groups, and The Importance of Analyzing Group Strength.
In this post, we'll take a look at two important concepts in the stock market: sectors and industry groups. We'll explain what they are and how you can identify them, as well as why they're important, so you make better investment decisions, maximize profits, and minimize your risk. Now, let's get started!
What is a Sector?
A sector is a group of stocks that are related based on the products or services they offer.
For example, the healthcare sector includes companies that make drugs, medical devices, and provide healthcare services.
The Global Industry Classification Standard (GICS) divides the stock market into 11 sectors.
These 11 sectors are made up of Communication Services, Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Real Estate, and Utilities.
Stock sectors can be further divided into industry groups. These are more specific categories that companies fall into based on their primary business activities.
What is an Industry Group?
An industry group is a more specific sub-group within a sector. Industry groups are important because they can give you a more detailed look at how a sector is performing.
For example, let's say the healthcare sector is doing well but the pharmaceutical industry group is struggling. This could be due to new regulations or a decrease in demand for certain drugs. A stock that falls into the pharmaceutical industry group would be more likely to underperform than a stock in the healthcare sector as a whole.
What is GICS?
The Global Industry Classification Standard (GICS) is a stock classification system that was created in 1999 by MSCI. It consists of 11 sectors, 24 industry groups, 69 industries, and 158 sub-industries.
The 11 sectors consist of:
- Communication Services – The newest sector, contains companies that provide telecommunications and media services.
- Consumer Discretionary – Companies that make consumer durables, apparel, automobiles, and other non-essential goods and services.
- Consumer Staples – Companies that make essential goods and services such as food, beverage, tobacco, and household products.
- Energy – Companies that explore, develop, produce, and market crude oil, natural gas, and electricity.
- Financials – Companies that provide banking, insurance, and investment services.
- Health Care – Companies that make medical equipment, and pharmaceuticals, and provide healthcare services.
- Industrials – Companies that make and sell industrial goods and services, including transportation equipment and services.
- Information Technology – Companies that make and sell computer hardware, software, and other innovative services and products.
- Materials – Companies that make chemicals, metals, and minerals.
- Real Estate – Companies that own and develop real estate properties.
- Utilities – Companies that provide water, electricity, and other natural gas and energy services.
How Do You Identify Leading Sectors and Industry Groups?
There are a few different ways to identify leading sectors and industry groups. One way is to keep track of the performance of stocks within each sector and/or industry group over time. For example, if your technical analysis shows that stocks in the medical/healthcare sector are clearly outperforming most other sectors, as well as the general market for a period of time, then the medical/healthcare would be considered a leading sector.
You can then take it a step further and hone in on the strongest industry group, or groups within a particular sector. Let’s say for example that within the larger medical/healthcare sector, the biotechnology industry group has been exhibiting more strength than the rest. Then that would be considered a leading industry group, within a leading sector. You can then drill down on the strongest stocks in a particular industry group from there.
Another way this can be approached is from the top down. This involves keeping track of the individual sectors and industry groups as a whole, over a period of time to see which are the strongest. You can either follow a service that ranks the stock market’s sectors and industry groups on a regular basis for you, or you can look at the individual sector and industry group charts on a regular basis on your own. In fact, the CANSLIM Investing Methodology offers a comprehensive approach to analyzing the market and individual stocks, aligning well with these strategies.
Either way, you choose to go about it, you will always be aware of where the money is rotating to and from.
Try our free position size calculator to help determine how many shares to buy.
Why is Sector and Industry Strength Important?
Once you have determined the direction of the general market, the next most important thing to get correct is which sectors and industry groups are leading the market, no matter the direction.
It’s important to remember that the direction of a stock’s price is almost 50% directly attributable to its sector and industry group, according to studies done at William O’Neil + Co. So, it’s an essential component not only to achieving enormous gains in the stock market but to your risk management process as well.
The Bottom Line
When it comes to analyzing the market’s sectors and industry groups there are two basic things to keep in mind:
- The performance of the sector or industry group over time
- The current level of interest in the sector or industry group
This process is the key to tracking rotation in the market and hence, keeping your finger on the pulse of the market’s health and breadth at all times. Maintaining this level of awareness will allow you to know when it’s time to get into or out of certain sectors and industry groups, and ultimately, make more money in the stock market.