It is the most important foundation for all of your trades, in the stock market or even the bond market or commodities market and so on…
So what I’m gonna do here… Is SHOW you the difference between sectors each year.
And what you’re going to notice, is that even if you made a great set of trades in a given year, if they were in the wrong sector, you probably lost anyway, or made a lot less than you should have…
Alternatively, if you were in the right sector, even if you did the bare-bones minimum, you might possibly have been making a steady profit all year round!
Let’s look at 2017… The S&P 500 index - What most people just call the Stock Market - gained 21.83%. A great year.
But here we can see the Energy sector was down 1% even though the stock market was up 21.83%. So what does that tell us…
Well, first of all, one thing to consider is that 90% of professional stock market fund managers underperform the stock market average. So in 2017 they returned their investors less than that 21.83% that the stock market returned.
But you could have beaten the stock market’s return - and beaten 90% of fund managers - simply by not owning energy stocks.
That chart shows the stock market divided into the major sectors.
If you just eliminated energy stocks - stocks that are members of the Energy sector - from the S&P 500 index you would have beaten the market. Something fewer than 10% of fund managers manage to do.
Now look at the Technology sector, up over 34% in the same year the stock market returned 21.83%. So the tech sector profited over 50% more than the stock market did.
The sector dispersion, or difference, was 35% - between Technology up 34% and Energy down 1%.
Let’s look at a few more.
In 2016 it was a very different story - in fact Energy stocks weren’t the worst performer. This time they were the best performer, up over 28% when the stock market average returned less than 12%.
The Energy sector returned more than double the stock market’s return.
With the Energy sector up 28% and the Healthcare sector down 2%…
So that’s a sector dispersion totaling 30%…
Here’s 2015 and you can see more than half of the sectors were down and the stock market only gained 1.4%.
If you owned energy stocks you were hit with a decline of 22% while Financials stocks gained 10%.
Sector dispersion was 32% - with energy down 22% and Financials up 10%.
And in 2007, the year the stock market made a major top before crashing in 2008, there was a huge dispersion. The Energy sector was up over 36% while Consumer Cyclicals and Financials were down 14% and 22% respectively.
That’s a 57% difference in returns in just one year!
Energy up 37% and Financials down 20% - that’s 57% dispersion.
Let’s look at just one more - 1999.
Technology - up over 65% for the year. Some of the more narrowly focused sub-sectors within the Technology sector were up several hundred percentage points that year.
The dispersion was 80% since the tech sector was up 65% and Consumer Staples was down 15%.
So the key is to be in the right sectors!
Tomorrow we’ll look at another profit-making trading rule. Why you should ALWAYS buy the sectors that large institutions are already buying.
See you then!
Founder, True Market Insider