Thursday, August 20, 2009

Watching Sector Leaders in the Stock Market

Here's a little nuance that I didn't include in the webinar:

When tracking the stock market sectors, pay particular attention to the sectors that are outperforming in a rising market and underperforming in a weak market. These are the lead sectors in intraday upswings and downswings.

Very often, we'll see sector rotation when those upswings and downswings are reversing. Large traders take profits in their long and short positions in those lead sectors. When traders see that the leaders to the upside or downside are starting to lag, it prompts selling or buying across other sectors and a reversal is born.

Conversely, if the lead sectors retain their lead status even during short-term consolidation, I'm more likely to hold on to see the upswings or downswings continue.

A different way of saying all this is that sector rotation is more typical of range markets than trending ones. When we see rotation after a trending move, it's often a sign that, for the time being, the trend has exhausted itself and is finding other time frame participants taking the other side of the trade.