The 9 Major Stock Market Sectors Every Trader Should Know

If you want to be in the right stock at the right time, here are the 9 major stock market sectors you should look at everyday. When a sector is in a bull market, stocks in that sector will usually rise along with it. The beauty about studying sectors is that they enable the trader to find stocks that are hot and are likely to outperform the stock market by a wide margin. It is not uncommon to find a stock that will go up 100% while the stock market goes up by only 5%. If you know where to look for the stock, you will find it. One of the ways to find these stocks is to check out which sector is hot at the moment.

The 9 Sectors

There are perhaps lots of different categories and ways to catalog stocks into different sectors. Therefore, in the eyes of different market participants, there are different amount of stock market sectors. But for out purposes, I would like to introduce you to 9 sectors that I call the 9 major stock market sectors.

The 9 major sectors are:

  1. Basic Materials (XLB)
  2. Energy (XLE)
  3. Financials (XLF)
  4. Industrials (XLI)
  5. Technology (XLK)
  6. Consumer Staples (XLP)
  7. Utilities (XLU)
  8. Healthcare (XLV)
  9. Consumer Discretionary (XLY)

In order to simplify the job of analyzing each sector, many traders use ETFs to track the performance of these sectors. The symbols next to each sector above is the etf ticker symbol for the sector. In fact, you can even trade the sector ETF by itself.

I will provide a brief introduction to each sector below and their significance. I have also put in some links to a deeper explanation of the sector on Investopedia so that you can read up on it if you have time.

Basic Materials Sector

According to Investopedia, the basic materials sector consists of " companies involved with the discovery, development and processing of raw materials". This sector is important for us to look at because they reflect the boom and bust of a country's development. For example if construction and the housing market and nation building is growing in America, then the companies that supply these materials will tend to do well.

Important stocks in this sector include:

  • Freeport-McMoran
  • Dow Chemical
  • CF Industries
  • Newmont Mining

To gauge the health of this sector, we look at the XLB which is the etf for basic materials sector.

Energy Sector

According to Investopedia, the energy sector is comprised of companies that "relate to producing or supplying energy." Oil and gas companies fall in this category. Some of the major stocks in this sector include:

  • Chesapeake Energy Crop
  • Kinder Morgan Inc
  • Cabot Oil & Gas
  • Marathon Oil
  • Exxon Mobil
  • Haliburton

The ETF we use to track the performance of the energy sector is XLE.

Financial Sector

The financial sector consists of banks that offer financial services, insurance companies as well as asset management firms. They represent the health of the financial institutions which are the backbone of modern day finance. Major bull market are often reflected by the health of the financial sector. Thus, if the financials are good, the stock market is likely to move higher. If the financials are weak, then the health of the bull market might be in trouble. 

One can only look at the financial crisis in 2008 to know how important the financial sector is to the health of the stock market. When bank stocks were crashing, it brought the whole stock market down with it.

Some important stocks in the financial sector include:

  • Bank of America Corp
  • Wells Fargo
  • JP Morgan
  • Goldman Sachs
  • Morgan Stanley
  • Berkshire Hathaway

The ETF we use to track the financials is XLF.

Industrial Sector

According to Investopedia, the industrial sector relates to "producing goods used in construction and manufacturing. This sector includes companies involved with aerospace and defense, industrial machinery, tools, lumber production, construction, waste management, manufactured housing, cement and metal fabrication."

A rising industrial sector hints of expansion and therefore good for the stock market. We use the ETF XLI to track the performance of this sector.

Some important stocks to take note of in this sector include:

  • General Electric
  • Boeing
  • Caterpillar

Technology Sector

The technology sector consists of stocks that are related to techs. This is a sector I love. Anything to do with modern technology is usually found in this sector. Some very famous stocks in this sector include the likes of Microsoft, Google, Apple, Netflix, Facebook and many more familiar names.

One very important thing to note about the tech sector is this:

A true bull market is lead by the technology sector. When the tech sector leads the market, this is a sign of a true bull market. 

That is why it is important for us to study the performance of the tech sector. The ETF we use to track the performance of this sector is XLK.

Consumer Staples Sector

According to Investopedia, consumer staples are "essential products, such as food, beverages, tobacco and household items. Consumer staples are goods that people are unable or unwilling to cut out of their budgets regardless of their financial situation."

Consumer staples are considered defensive sectors because they tend to fall less when the market is down. During a bear market, consumer staples often perform better than other sectors such as techs or consumer discretionary stocks. Which is why if you see the consumer staples sector outperforming techs, then it can be a sign that the market is not going to be good in the near future.

Some important stocks in the consumer staples sector are:

  • Coca Cola
  • Altria
  • Kroger
  • Walmart
  • Procter & Gamble

The ETF that we use to track the consumer staples sector is XLP.

Utilities Sector

The utilities sector is comprised of companies that provide electricity, gas, water etc to consumers. These companies usually give good dividends to its stock holders and therefore they produce cash flow for investors. You can read more about the Utilities Sector by checking out Investopedia's short article.

Some important stocks in the utilities sector include:

  • Southern Company
  • Exelon Corporation
  • First Energy

We track the utilities sector using the ETF XLU.

Health Care Sector

The health care sector comprises of companies that deal with healthcare. They include biotechs, drug manufacturers, health care plans. Many health care companies have benefited from the rising cost of healthcare and the growing citizens of all ages that need access to better health care.

We use the ETF XLV to track the health care sector.

Consumer Discretionary Sector

The consumer discretionary sector comprises of stocks that produces things that people don't really need. It is more of a want. For example. Starbucks is a consumer discretionary stock. When people have more money, they can afford to spend more on Starbucks, but when times are not so good, they can make their own coffee and stay away from Starbucks. That is why they are called consumer discretionary stocks.

A rising consumer discretionary sector tells us that consumers are more willing to spend money. This in turn shows us that the economy is doing well because 2/3 of the US economy is made up of consumer spending.

Some important stocks in this sector include:

  • Ford
  • Nike
  • Netflix
  • Starbucks
  • Disney
  • Best Buy
  • Mc Donalds

To track this sector, you can use the ETF XLY.

Is The Sector Trending Up Or Down?

Now that we have gone through the basic introduction to each sector, we now move to the important part for the trader. The questions that every trader needs to ask is this:

  • Is this sector hot?
  • Is the sector trending up?
  • Is the sector trending down?

Some of the best gainers in the stock market comes from a hot sector that is trending up. Every year, there are one or two sectors that really outperform other sectors by a wide margin. It is up to us to recognize the start of a new bull market in a sector. Then we zoom into individual stocks.

It is important to note that at least 50% of the reason why a stock moves up is because of the sector. Therefore, it really pays to pay attention to where a sector is going.

Take a look at the 2 charts below. 

The first one is the technology sector ETF, XLK. You can see how it started a new uptrend in December 2016. The sector actually broke out of a consolidation in 2016 and from there the XLK had a really nice bullish uptrend. The sector is still in a nice uptrend and recently just broke out of another consolidation.

The 2nd chart is the chart of Facebook. I have put them next to each other with the same time frame and length so that you can see how the tech sector helped to lift Facebook. Many many tech stocks also got a boost from the rising tech sector. 

9 major stock market sectors every trader should know

The lesson here is this:

  • If you want to invest in a stock, check out if the sector is hot or not. You can see whether it is hot or not by determining whether it is in an uptrend or not. 
  • The best time to invest in a stock is when the sector that the stock is in is starting a new bullish uptrend.
  • If a sector is in a downtrend, often times it is best to stay away from the stocks in that sector. Alternatively, you can learn to short those stocks.

Support And Resistance And Breakout Areas For Traders

If you are a short term trader, one of the best ways to catch a nice move is to check the sector for:

  • Support areas
  • Resistance areas
  • Consolidation areas for breakouts
  • Important moving averages like the 20 MA, 50 MA or 200 MA

It is when the sector ETF is at these important areas that a nice short term play will happen for your stock.

Let's take a look at an example below:

The 1st chart above is the chart of XLV which is the ETF for the healthcare sector. Notice the ascending triangle chart pattern that it was forming? Notice also the double bottom that happened at support when it formed?

What happened in the sector chart is important because what happens there will affect the components in the sector.

The 2nd chart is the chart of ABBV which is in the health care sector. See how the stock almost mimic the movement of the sector. The main difference is that the individual stock can often produce a better trade candidate for the trader. The reason is they often give the trader a more clearer pattern and a better risk reward.

Indexes and sectors can move 1% or 2% in a single week. But a stock can often move 5% to 10% in the same period of time.

Conclusion

I think for most new players in the market, this article will be an eye opener. What you are learning today is a small part of the top down approach. The top down approach states that a stock needs to be analyzed in the light of the overall market condition, the sector, the industry and then finally the individual stock. Always consider the big picture and your trading and investing will improve dramatically.

Charts with the Freestockcharts.com label are courtesy of Freestockcharts.com

Charts with the investing.com logo are courtesy of Investing.com powered by Trading View

  • If you like this article, consider starting the Stock Market Course. It is free and jam packed with great information for newbies.
  • Want to have updates on the financial markets? Join my Telegram Channel. Dstockmarket.com Channel.
  • Help support this page and press the Facebook Like button below. Thanks!

Recent Articles

  1. Technical Analysis Lessons From OKA Corp Stock Chart

    Aug 17, 18 05:07 AM

    In this lesson we will take a look at the technical developments of OKA Corp's stock price and why it moved the way it did. We will also have a look at what might happen to OKA's stock price.

    Read More

  2. Technical Analysis Lessons From BMY Stock Chart

    Aug 16, 18 07:28 AM

    In this lesson, we will learn how and why BMY manage to bottom out and start a new uptrend.

    Read More

  3. Technical Analysis Lessons From Pentamaster's Stock Chart

    Aug 14, 18 08:19 AM

    In this lesson we will learn and examine why Pentamaster was able to recover all of its losses to start a new uptrend and achieve new highs.

    Read More

  4. Technical Analysis Of KLCI August 13 2018

    Aug 13, 18 05:56 AM

    The KLCI is currently at resistance territory after a nice big rally. I would consider a sideways trading a possible scenario at the moment.

    Read More

  5. Technical Analysis Lessons From AAPL's 15 Min Stock Chart

    Aug 13, 18 05:22 AM

    In this lesson, we will learn how AAPL's 15 Min stock chart formation help to send the stock higher for 2-3 days to give traders a nice swing trading opportunity.

    Read More

New! Comments

Have your say about what you just read! Leave me a comment in the box below.