Confessions of a Wild Sector Hunter
Thursday, November 20, 2008 | Bob De DeaRating:
[Editor’s Note: Congratulations to Bob De Dea, who has just been officially certified by Teeka Tiwari on the ETF Master Trader System. Bob is an active member of the CASH Community, helping other ETF Master Trader members better understand the basics of ETF and sector rotation trading. Please welcome Bob to the Tycoon family. In the coming weeks, he will be sharing some of his articles on ETFs and sector rotation trading with Tycoon Report readers.
If you’d like to register for the winter session of the New ETF Master Trader Online Edition, go here now. Enrollment for the winter session ends soon and is only open to a limited number of Tycoon readers. So sign-up today!]
If you’d like to register for the winter session of the New ETF Master Trader Online Edition, go here now. Enrollment for the winter session ends soon and is only open to a limited number of Tycoon readers. So sign-up today!]
As a member of Teeka Tiwari’s ETF Master Trader, I’ve come to appreciate the discipline and training of the wild game hunter. (Stay with me – I’ll explain.) As every experienced big game hunter knows, it takes skill to track an animal, to approach it with quiet caution and steely disinterest, to wait for the most opportune moment when the danger is lowest, to pull the trigger when the time is ripe. Each animal has its own vulnerability and its own danger: grizzly bears pose a different threat and offer a different challenge than the moose or the elephant. It’s the job of the big game hunter to know his or her prey.
Finding an appropriate security to invest in is a lot like hunting for big game. Today I’d like to discuss the nature of that wily, evasive animal, the stock market.
Contrary to popular belief, the stock market is not a single entity, not one creature but a many-headed beast, or, as I like to think of it, as a corral of wild game. Those of you who’ve been around long enough have heard the experts here at Tycoon speak of “the internal market” and “the external market”; you’ve been briefed on the Dow 30 vs. the NYSE 3000; you’ve picked up a thing or two about Point & Figure charting. You may have even heard Teeka speak of concentrating on sectors or seen Chris’ use of the SPDR Sector Tracker in his weekly video reports. Just what are these sectors and why are they important?
Simply put, sectors are just parts of the market. Here’s a more extensive definition, direct from the Investors Dictionary:
The term Market Sector is used in economics and finance to describe a set of businesses that are buying and selling such similar goods and services that they are in direct competition with each other. Analysts divide the stock market itself into market sectors so that shares of companies that are in direct competition are listed alongside each other.
The stock market is broken down into ten broad sectors, but Technology and Telecommunications are usually lumped together in one category, so here’s a list of the nine sectors on Sector Tracker, comparing performance against the S&P 500:
Yesterday, Nov. 19, was a dismal day all around for stocks. But you can see how some sectors performed better than others. The best performers were the component stocks that make up the Utilities and Consumer Staples sectors. The worst performers were the stocks in the Financials sector. Remember, we’re looking at only one day here. Just as we should always defer to the long-term trend when studying the broad market (for example, when looking at the S&P 500 or the NYSE), we must also take the time to learn the long-term patterns associated with each individual sector.
Choosing Our Target
Just as the rabbit is different from the bear, each sector is different from another. Choosing a sector to invest in requires a knowledge of the general market and an analysis of the individual sectors. Once we determine the long-term trend of the market, we must consider the long-term trend of each individual sector. We must also compare each sector to the market to determine its relative strength. And we must study the BPI of each sector to understand the “behavior” of the sector over time. Then, we must look for the signs that indicate how and when to pull the trigger on the trade. This takes time and a little effort.
But if we want to bag the big game, it’s what’s required.
Fortunately, we have tools that can help us in our Sector Hunting. First and foremost, one of the most valuable resources is right here at The Tycoon Report – the free education and advice you get from financial professionals.
Another extraordinary tool is the exchange-traded fund itself. For those of you new to the game, the ETF is a security that is made up of a pool of underlying assets, just like a mutual fund. Unlike a mutual fund, however, it trades like a stock. The best part about ETFs, though, is that they represent diversified investments in almost anything you can imagine: large-caps, mid-caps, small-caps, currencies, countries, industries, and – you guessed it – sectors.
In fact, in the graph above, the three-letter abbreviations after each “SPDR” refer to ETFs that track the nine sectors listed. You can therefore use these ETFs to begin your own research: compare their performance to the market, compare their performance to each other, and in so doing you can become a novice Sector Hunter.
Of course, there is much more to understanding sectors that I’m not at liberty to divulge because it wouldn’t be fair to ETF Master Trader subscribers. In this series, I will touch on some of the techniques and tricks I’ve learned through Teeka’s program, but if you want to know more about hunting and bagging the big game sectors, check out the new ETF Master Trader yourself. Tell ‘em I sent you.
And always remember (with apologies to Mr. Tiwari), “Let the big game come to you.”
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Bob De Dea
Guest Contributor
The Tycoon Report
