Importance of Sector Performance

• According to IncredibleCharts.com, the financial condition and future prospects of an individual company have a relatively small impact on the performance of its stock price. Stock prices tend to rise and fall together, so the performance of the overall stock market makes up 66 percent of a stock's price performance. After market performance is factored in, the sector the stock is represented by makes up 24 percent of its price performance, while individual company achievements impact only 10 percent of a stock's overall price direction.
  
  

Measuring Market Performance

• Before you evaluate individual sector performance, measure the performance of the overall market since this has the biggest impact on the price of stocks. A simple way to measure the market trend is to use a chart of the S&P 500, which is an index made up of the 500 largest companies in the U.S. Most charts allow you to place a 50-day price average over the price area of the chart. The 50-day average is a line representing the average price of the past 50 days. If the line is generally rising and the index price is above the line, the market trend is healthy and buyers are in control. If the line is falling and the price is under the line, stocks and sectors are likely under selling pressure.
  
  

Finding Leading Sectors

• Once you have established that the market is healthy, search to find which sectors are strongest. Financial sites such as Bloomberg, Nasdaq and Yahoo! Finance all provide sector search tools (see Resources). Nasdaq's website, for example, lists each sector's 52-week price gains in descending order from the sector that has made the largest price gains to the sector that made the least.
  
  

Sector ETFs

• In healthy markets, leading sectors tend to continue leading. Each market sector is represented by at least one ETF -- some popular sectors have several ETFs representing them. For example, if you discover that the retail sector is leading the market, you can participate in this sector's performance by buying shares in RTH or XRT. If the semiconductor sector is leading the way, you could purchase SMH.