How to Find Good Stocks Using Sector Analysis

In the world of stock trading there is no one method for finding good stocks to buy with great returns. There is simply to find what works for you and to realize that your trading knowledge can always be improved upon as you gain more wisdom about the markets. Trading stocks is one area of your life where there is always something new to learn.

In this article I will explain one way that works well for me and I will describe step-by-step how to arrive at some really good stock picks for your portfolio. If you have ever followed the financial news you have no doubt heard some of the financial analysts talk about some of those high-flying stocks that cause you to think, “If I only knew about these stocks before they got popular I would finally make some real money.” Well, finding those stocks before the analysts mention them is not only possible, but the more you practice what I am going to show you, it will be very likely that you will notice and trade many stocks before they get the widespread attention given to them by the analysts.

Ever think about what happens to all that money when the stock market goes down or up? If you thought about the fact that when a stock goes down – value simply evaporates, you are onto something important but there is also something far simpler going on here. As stock prices fluctuate an observant person realizes that the money does not evaporate along with value, rather it moves, it changes hands. Think of money like the ebb and flow of the tides. People all over the world commit lots of energy to chasing value and that does not just exist in the stock market. It is everywhere, it is in the currency exchanges, bond markets, you name it. Money is moving all around the globe and when it moves in concert, when many people share the belief that something has value that is where we see the money going. This is a key consideration traders around the globe must consider constantly as they seek to invest their money where they can find the most value appreciation happening.

On a much smaller scale yet no less profitable, this is happening in the stock market every minute of every day and what you will see in a moment is that there are easy ways to see where the money is moving, where some condition exists which is causing an increasing number of traders and investors to accumulate their money in an increasingly favored area of the market.

Every company in a market can be categorized by what industry or sector they are in. Retail, Basic Materials and Energy are a few examples of some widely understood industry sectors. Each of these sectors contain many component stocks assigned to it. More interesting however is that each sector is tracked as to the aggregate performance as if it were an individual stock itself. This is very useful because as a trader you can see how each sector is performing. More importantly – for us as traders, we can compare each sector to one-another as if we are simply comparing two stocks. Taking this simple concept and applying it across many sectors and applying some simple trend analysis, we can easily begin to see which sector is currently in favor.

It is not enough to simply compare any two sectors on a day-to-day basis. While one sector may be outperforming all others today we can not be sure of any underlying performance trend. It is important to look at the performance trend over time to determine whether one sector is gaining in support and overall if it is performing better than other sectors. The goal is to find the best performing sector or the sector that is about to experience great performance according to our trend analysis.

Once we identify the sector with the best potential over all others and we can be relatively certain that the money is flowing into our chosen sector, the next step is to find the component stock within that sector which is contributing to the most to the performance of that sector. This is simply an iterative process where we compare all of the component stocks within that sector until we find the one with the best potential.

The result of applying this simple sector analysis then finding the most promising component stock is that we have identified the strongest stock within the strongest market sector, overall increasing our chances of making a profit from identifying and trading the best of the best.

I have found this method to work consistently enough that I find nearly all of my trades this way and reap fantastic profits from the market. The greatest side-benefit being that the analysts from the financial news often identify and speak about the stocks that I am already trading and I can reap huge rewards as I am consistently one step ahead of the news.