Sites for Sector Investing
11/24/00 11:31 AM ET
You can do all the fundamental research in the world and find yourself a great stock to buy. But if that stock's in a sector with a bad rep, it'll probably get beaten up. Just think how often bad news about a dominant player drags down the stock prices of its competitors or suppliers. This past Monday, for example, optical component supplier Brocade Communications (BRCD:Nasdaq - news) nose-dived from $220 to $190 as analysts fretted over how sales downturns in the optical-networking sector would affect other companies in that group. Brocade wasn't downgraded, but its stock acted as if it had been.
What Is a Sector?
Sector drivers are critical to investing success. Yet, the word sector is one of those terms everyone uses yet no one seems to know what it means.
Two financial dictionaries I often turn to, the Dictionary of Finance and Investment Terms (Barron's) and Wall Street Words (Houghton Mifflin), basically define a sector as a group of companies sharing similar characteristics. Airlines compose a sector. So do camera manufacturers. And the companies within either of those sectors compete with one another. But sectors can be broader. Interest-rate sensitive companies -- which might include banks, heavy capital-equipment manufacturers and homebuilders -- also fall within a sector.
The key here is that Wall Street analysts have grouped these stocks together in some way. And as one trades, its peers tend to follow suit.
So how can you tell if a sector's ripe for a fall or poised for a breakout? You can pore over analysts' reports, devour trade journals and stay abreast of news relevant to your stocks. We won't discourage you from that healthy due diligence. But if you want a faster read on how sectors are performing, here are a few sites that can help.
ETFs and HOLDRs
Let's start close to home. Each Saturday, TSC publishes the ETF and HOLDRs Weekly Report. The report covers exchange-traded funds that contain a basket of stocks. (For a primer on ETFs, read this report.) Many ETFs focus on a particular sector, so their prices closely track what's going on in that sector. In that way, ETFs serve as an easy-to-read sector barometer.
Talk about easy-to-read barometers: SmartMoney.com's arsenal of java apps neatly distills the entire market's worth of information into a selection of simple charts, each one offering a slightly different view. SmartMoney.com's Sector Tracker www.smartmoney.com/sectortracker, for example, creates a 3D-chart that shows how different sectors are performing intraday. You can also track a sector's performance for up to a year. And you can zoom in to see how individual companies are doing for the same periods.
Another SmartMoney.com java app called Sector Map www.smartmoney.com/sectormaps creates an image that resembles checkerboard farm fields viewed from the air. In the language of online financial tools, this application is called a heat map. To create the map, choose one of the 11 sectors listed on a pull-down menu. Once the map is formed, you'll see that the large red areas denote major sector players with declining stock prices. Green areas signify stocks that are up. In either case, the brighter the color, the bigger the price move. You can navigate your cursor over a square to get the name of the company and then click to get more information.
Scrolling Tickers and Screens
Heat maps don't track individual trades. If you want to track the prices of stocks within a particular sector, surf over to another site called JavaTicker.com. With a few mouse clicks, you can set up a scrolling ticker covering stocks within a long list of sectors. Like SmartMoney.com, JavaTicker displays quotes delayed by 20 minutes.
JavaTicker.com also has a screening feature that lets you rank stocks within sectors. Click on an indicator such as "price/earnings" or earnings per share and you can rank the list of stocks accordingly.
The trading community site ClearStation's new Sector tool also screens stocks by sector. But it looks at those sectors and their component companies through a much more powerful lens. The first screen divides the market into 12 broad-based sectors. Click on any one of those, such as energy or health care. In a moment -- this site loads fast -- you get a more refined list of sectors. Click again and you get a list of component companies.
But it's the indicators along the top row of the list that make ClearStation.com's tool really useful. Click on Technical View (it's toward the upper right-hand corner of your screen) and you can see how a sector or a company has traded over the past one, five or 13 weeks. Likewise, you can get a read on its relative strength (how the stock price is holding up in comparison to an index), check out volume, or find out how many new highs and lows it has achieved. Click on Fundamental and the indicators that come up include things like the PEG ratio and the latest analyst rankings.
Then there's maybe the best feature of all: Each of the sectors comes with its own discussion thread, which will let users share ideas on how to use of all this information.
Forecasting with Options
All the sites I've talked about so far essentially show how a sector is currently trading or how it's traded in the past. By contrast, the prices of index options on the Philadelphia Stock Exchange offer a prediction of the future. The exchange tracks 11 sector indices -- everything from oil (OSX) to banks (BKX) to wireless telecom stocks (YLS). Put and call options on each of these sectors also trade here. Sophisticated traders often use these options either to hedge their positions or to speculate on the direction of a sector.
If you track the changing prices of the Philly's index options, you can get an idea of how these traders believe the sector will fare in the months ahead. For example, if out-of-the-money (glossary) puts were to rise, the prevailing outlook is bearish. The outlook would be bullish if out-of-the-money call options were to rise in price.
Best of Show
In talking about sector investing, I'd be remiss if I didn't mention Sectorbase.com, a site used by institutional traders, investment bankers and the like. Sectorbase.com's incredible database lets you do side-by-side comparisons of companies, down to the products they market and even the components that make up those products. The user fee: $895 a month.
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