Usefulness of the industry?

andread · Sep 13, 2006

When looking at a stock It is sometimes a good practice to consider how the industry is doing.
There is a big difference, however, between aluminum industry, with 13 stocks, and the software industry, with 529 stocks, according to MarketWatch. ranging from ADBE to SYMC. These companies don't have much in common. That doesn't look very helpful to me.
I wanted to ask you guys if, when, and why you look at the industry a stock belongs to

Pekelo · Sep 13, 2006

One reason I don't like stocks is the flock behaviour of stocks belonging to the same sector.

Let's say you are watching a small tech company and it just had some good news thus it supposed to go higher, but Dell or Google just announced a bad quarter and being dominant in their sector, they pull everybody down with themselves...

So if you want to diversify, make sure that not too many stocks belong to the same industry/sector...

One way to simplify this issue is to trade an ETF. You get diversification and you don't have to hunt for individual stocks...

andread · Sep 13, 2006

Quote from Pekelo:

One reason I don't like stocks is the flock behaviour of stocks belonging to the same sector.

But what I meant is: isn't this something you can use at your advantage? I mean, if you know that an entire sector is going down, that will make more likely that a stock in that sector will go down. It's some information you can use.
What I don't understand is if and why I should care about what a sector does if that sector has hundreds of stocks with very little in common.
I often see comments like "look at the industry", or "the industry is doing very well"; but what is the importance if there are so many stocks with so little correlation?

Thanks for the answer

TRADERBM · Sep 13, 2006

just by 2 cents.

I break down the major sectors and have select stocks that I know move well in each industry.

When I see sector buying/ selling, I have a good idea what I want to be trading.

Its all about getting to know your stocks and how they trade.

Its all about preparation

andread · Sep 13, 2006

Quote from TRADERBM:

just by 2 cents.

I break down the major sectors and have select stocks that I know move well in each industry.

When I see sector buying/ selling, I have a good idea what I want to be trading.

Its all about getting to know your stocks and how they trade.

Its all about preparation

ummm...not completely clear.
Does the sentence "I break down the major sectors" mean that you make your own categories?
If yes, does it also mean that you also build your own indices, made with stocks with a higher correlation?
If not, does it mean that you pick a stock with a high correlation with a predefined sector (or industry)? Are you always able to find it? It's hard to me to imagine that such a stock can always exist, considering the high amount of stocks that can make a sector

Pekelo · Sep 13, 2006

Quote from andread:

But what I meant is: isn't this something you can use at your advantage?

Sure. When I was still watching stocks, I had a few on my watchlist that were chronic latemovers. They lagged their sector's move by 5 mins or so, thus you had plenty of time to go long or short depending on how the sector (ETF or the whole market) behaved...

This is how you look for these laggers. You put on the chart your sector's ETF (let's say QQQQ for techs) and compare it to various tech stocks. When you can see a decent time of lagging, there you have your little moneymaker...