Stock Sectors: How to Identify Hot Stock Market Sectors

By January 24, 2019Trader Tips

If you’re new to investing in the stock market, then the vast number of stocks you have to pick from can be overwhelming.

But don’t get discouraged! Here, we’ll help you make sense of it all, and show you how to sort through it all quickly and efficiently.

(Once you try our platform, you’ll never want to pick stocks the old way again!)  

You can start by deciding on specific sectors that you want to invest in. Rather than comparing random stocks individually.

It’s crucial to understand the overall trends of an entire sector before you can start evaluating specific stocks — especially for a beginner.

The overall sentiment surrounding a sector can have a significant impact on how an individual stock within it performs.

In this article, we’ll show you what a stock sector is. We’ll teach you the 11 main sectors of the stock market. And we’ll show you how to find sectors of the stock market that are hot right now!

What Are The Stock Sectors?

stock sectors image

First, what’s a sector, anyway?

You can think of a stock sector kind of like a genre in a bookstore. They’re overall categories that represent the purpose of the stocks contained within them.

In a book store, you’ve got categories like romance, mystery, and non-fiction.

In the stock market, sectors get broken down the same way into categories like energy, finance, and healthcare.

Usually we break the market down into 11 major sectors. These sectors make up the main areas of our economy.

In each sector there are individual publicly traded corporations that have the same overall focus.

But why would you want to pay attention to sectors as a whole?

There are ways that you can invest in entire sectors at a time, such as by using exchange-traded funds (ETFs). This can be less risky than buying individual stocks within a sector, which might underperform compared to other companies in its same class.

Individual stocks in a sector can also tend to follow the same kind of pattern.

If you identify one rising stock in a particular sector, that might be an indication that the overall sector is going to be growing in the future. Then you can consider picking up similar stocks in the sector that may be undervalued — before other investors catch wind of what’s going on.

The 11 Sectors of The Stock Market

We mentioned that there are 11 sectors that people typically use to categorize the stock market.

Let’s check out the major stock market sectors and the kind of stocks they contain.

Financials

financials sector

This sector contains things like insurance companies, banks, and investment funds.

That includes companies like JPMorgan Chase & Co, Bank of America, and Wells Fargo & Company.

Stocks in the financial sector mostly earn money by issuing loans and mortgages.

They tend to go up in value as interest rates rise.

Consumer Discretionary

Consumer discretionaries includes things like apparel, media companies, retailers, consumer durables, and consumer service providers.

It’s things you might like to buy when you have a bit of extra money to spare.

It includes companies that make things like clothing, televisions, and even new cars. Companies include Target, Walt Disney Company, and Amazon.com.

The consumer discretionary sector does well when the economy is improving and consumer spending is increasing. But they can take a real hit during recessions and downturns in the economy.

Consumer Staples

Consumer staples are separate from consumer discretionary. They’re things you generally aren’t willing to go without.

Some companies in the consumer staple sector include Proctor & Gamble, and Kimberly Clark. They sell things like soap, food, and toilet paper.

Surprisingly, companies like Phillip Morris, Anheuser-Busch, and Coca-Cola are also considered consumer staples. You’d think cigarettes, alcohol and soda would be discretionary purchases. But historically companies that sell these kinds of products tend actually to perform better in weak economies.

That’s because they offer you a cheap form of comfort and indulgence. Even when you don’t have much money left over, you can get some happiness from a cheap case of beer or a pack of cigarettes.

These companies can do well even during an economic downturn, but they don’t have a ton of upside during a booming economy either. They’re a more defensive investment.

Utilities

The utility sector is made up of water, gas, and electric companies. It also includes alternative energy companies like solar electric, wind turbines, ethanol, and geothermal producers.

These companies make recurring income by providing power and water to businesses and consumers. Companies in this sector tend to give higher than average dividend yields to stockholders.

Examples of some utility companies are Alliant Energy Corp, Clean Energy Fuels Corp, and American Water Works Company Inc. Some of these companies operate as legal monopolies.

Government regulation and rising interest rates can have a negative impact on utility companies. That’s because utility companies tend to hold large amounts of debt.

Energy

The energy sector is made up of companies that explore for and produce oil and gas. It also includes refineries and related operations.

Some stocks in the energy sector you might recognize are ExxonMobil, ConocoPhillips, and Bellatrix Exploration.

The performance of stocks in this sector is strongly tied to the price of natural gas and crude oil.

Healthcare

Healthcare is a big business in the United States. This sector consists of medical device manufacturers, hospital management firms, biotechnology companies, and many others.

Some healthcare stocks are CVS Health Corp, Johnson & Johnson, and BioMarin Pharmaceutical.

You can view the healthcare sector as both an opportunity for growth and a more defensive investment.

People will always need medical care, which is why stable stocks in this sector are often touted as “safe” bets. Naturally, however, past performance isn’t a guarantee of future results.

There are plenty of risky stocks in this sector, as well. Say, for example, there’s a biotech startup company poised to release a revolutionary new medicine or piece of technology. This is the sector where traders and investors can find companies like these.

Telecom

Wireless providers, internet service providers, as well as cable and satellite companies are all part of the telecom sector. Chances are you’re using services from at least a couple companies in this sector.

Verizon, AT&T, Qualcomm, and Reliance Communication are all in the telecom sector.

These companies make their revenue from recurring fees generated from customers.

Some parts of the telecom sector are relatively stable, while others are facing rapid change.

Industrials

This is quite a broad sector. It includes everything from manufacturing, fabrication, construction, machinery, defense, and aerospace companies.

Some big industrial companies are General Electric, DowDupont, and International Paper.

Industrial sector stocks do well when there is a demand for construction and manufacturing from companies in other sectors.

Technology

If you’re into the latest gadgets, then you’ll recognize a lot of companies in the technology sector. It includes companies that manufacture electronics and develop software.

Technology companies include Microsoft, Cisco, Dell Technologies, Hewlett-Packard, Samsung Electronics, and many more.

Companies in the technology sector tend to be driven by upgrade cycles, like when the next iPhone or version of Windows is going to get released. The overall strength of the economy can play a role too.

Materials

The materials sector contains companies involved with forestry, chemicals, refining, and mining. They’re focused on finding and gathering raw materials.

The sector includes:

  • Brazilian steel giant Gerdau
  • Hi-Crush Partners, which specializes in sand and minerals
  • Mining company Vale that extracts copper, iron, and gold

These companies provide raw materials at the beginning of the supply chain, so they can be vulnerable to downswings in the business cycle.

Real Estate

Real estate companies deal with residential, retail, and industrial real estate.

If you’ve ever been interested in the real estate market but don’t feel like being a landlord yourself, then this sector is a great alternative.

They make their money from their real estate holdings appreciating value, and rental income from tenants. Because of this, real estate companies can be strongly impacted by changes in interest rates.

Benefits of Trading The Right Stock Sector

Stock sectors are kind of like professional sports teams and players: they can be hot one season but underperform the next.

You’ve probably seen your favorite star basketball player or quarterback’s team go on long winning streaks. But they can also fall into slumps where they underperform too.

Stock sectors are the same way.

Changes in interest rates, government regulation, or the economy can create growing stock sectors for weeks or months at a time. But unfavorable news can send your favorite sector into a downturn just as easily.

By identifying the right stock sector to trade early on, it’s possible — but again, not guaranteed, of course — to ride its success until market conditions change.

Some traders also trade sectors in the short term on big upcoming financial news stories. For example, if there’s a rumor that the Fed is going to decrease interest rates, it could potentially be a great time to buy stocks in the financial sector.

Hot to Use a Screener to Find Hot Sectors

Learning to Fish for Stocks with STT

You don’t want to just go on gut feeling when it comes to deciding what the next hot market sector is going to be — that’s a recipe for disaster!

There are many indicators that you can use with a premium stock screener to help you find sectors that could be poised to blow up. Let’s discuss five of the big ones.

#1 Follow News Catalysts

Hot sectors in the stock market are often preceded by news catalysts.

Your detective work and logic can really help you here.

Sometimes you’ll hear news that will have an undeniable impact on a particular sector. For example, If the president declares war, you could see stocks in the industrial sector about to boom, particularly those associated with defense and aerospace.

While sometimes that kind of news impacts the market so quickly that you can’t possibly trade on it, you can also look for more subtle news catalysts to show you some lesser-known opportunities.

Here’s another example: If a big company like Apple announces that it’s increasing production of its phones and tablets by 300%, it’s likely that the individual stock will jump in price right away.

Now think about how other sectors could be affected by that news …

Suddenly the raw materials used to make electronic circuitry like rare earth metals could go up in value because of the increase in market demand, as could materials used to make phone batteries like lithium and carbon graphite. This is a time when some people will jump at the chance to trade stocks that mine and refine those raw materials.

You should always be brainstorming and theorizing ways that news in one sector might impact another.

#2 Stock Chart Patterns

Here at StocksToTrade, we’re big fans of stock chart patterns.

Did you know that stock market sectors can follow these patterns in the same way that individual stocks do?

Some patterns — like cup and handle, head and shoulders, and more — can also help you identify hot stock sectors.

Practice recognizing chart patterns in sectors, even when you aren’t trading them. Keep notes of patterns you see and follow up to see if the sector performs how you predicted in the future.

#3 Technical Indicators

Technical indicators like candlesticks, moving averages, and Bollinger bands all function by using mathematical calculations.

These calculations are based on volume, historic price, and other information to forecast where a stock might go in the future.

Like stock chart patterns, you can apply technical indicators to sectors as a whole, too.

If you’ve used technical indicators to screen individual stocks before, then using them on sectors works the same way. A chart is a chart.

#4 High-Volume Stock Watchlist

You should always have a stock watchlist already.

If not, what are you waiting for? It’s one of the most important trading tools that you should have in your arsenal.

Keep an eye out for stocks on your watchlist with higher-than-average volume. It can be a strong indicator of hot investment sectors, particularly if multiple stocks in the same sector are all surging in volume all at once.

#5 Trading Plan

A strong trading plan helps keep you disciplined. It lays out what kind of trades you want to make, along with when, why, and how you’ll enter and exit positions.

Your trading plan takes your risk management rules, personal expectations, and personality as a trader into account.

Any time you’re planning to enter a position in a stock sector, you should run it against the rules of your trading plan. That way you’ll take emotion out of the equation and avoid buying into a sector just because of market hype …

… Because we know that once the general public is getting hyped about a particular sector, it has probably already seen most of its potential growth and is about to peak.

Key Tips to Finding Hot Stock Sectors

So now you know what the 11 main sectors of the stock market are.

You’ve also got a solid idea of how to screen for hot sectors — or ideally, sectors that are just about to go hot.

Here are a couple of extra key tips to maximize your chances of success.

Hone Your Trading Skills Around Just One Stock Sector

Have you heard the old saying “jack of all trades, master of none?”

It refers to a person who has dabbled in a lot of different areas but has never focused on mastering any one area in particular.

Sure, you can trade all different stock sectors. But we recommend starting off by focusing on one (or maybe two) of them.

Consider taking a few months and becoming “the consumer staples trader” or “the energy sector trader.” Set yourself the challenge of only trading in one sector during that timeframe.

Learn everything you can about just one sector at a time — its history, what sorts of catalysts impact it, major companies within the sector, and other details.

You’ll learn way more by focusing on just one sector at a time than trying to learn how they all work at once.

After you’ve mastered one sector, you can move on to the next. In a couple of years, you’ll likely have more specialized knowledge about each sector than if you tried to trade all of them at once.

Stick to Your Favorite Patterns

Just like you should focus on one sector at once, we also think you should only focus on a couple of chart patterns at once.

In the beginning, sure, you can experiment and see what works best for you. But once you’ve had a chance to dabble a bit, pick a few of your favorites.

Get two to five chart patterns you really like, and practice consistently recognizing them as they come up. Once you’ve mastered them, you’ll probably feel much more confident about your trading.

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Conclusion

You might not find stock sectors as exciting as individual stocks — but understanding what sectors are and how they operate are an important part of your trading journey.

If you’re investing your money into a stock, you need to know how its sector as a whole performed. That information is just as critical to an individual stock as chart patterns, indicators, and news catalysts.

Get familiar with stock sectors! Take a look at how they’ve performed in the past year. Then pick one sector to focus on and really master it before moving to the next one.

In the long run, this can help shape you into a more well-rounded trader, which is a fantastic goal.

Which stock sectors are you most interested in right now — and why? Share a comment and let us know.

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