Choosing the Right Sector to Invest In? Let’s Make It Easy
A depressed market sector is one that is suffering from low volume, volatility, and prices. In other words, the stocks have declined in price, few traders are active, and the decline remains steady.
In most cases, investment sectors get depressed for extended periods of time.
Take energy, for instance. There are plenty of arguments to be made for excellent energy investments (which I’ll get to below), but there’s no denying the impact of oil prices on this sector. When crude oil goes down, oil and gas companies and their counterparts start to struggle.
Telecommunications is another depressed market sector. There’s no doubt that cable-cutters have influenced the economy, preferring to stream their entertainment at leisure than to subscribe to an expensive cable or dish service. While mobile growth remains strong, other elements of the telecom sector have been hit hard by technological advancements and consumer confusion.
The reality, though, is that even a depressed market sector doesn’t need to impact your trading by a significant degree, especially if you’re into penny stocks or day trading. You’re looking for individual opportunities.
Plus, depressed markets present opportunities for shorting stocks and benefiting from price declines. It all depends on how well you’re able to time your trades relative to the market movement.
Top Sectors to Invest in Right Now
If you’re looking for good stocks to consider for future investments, start with the investment sectors themselves. Following are my thoughts on the hottest stock market sectors.
There’s no doubt that information technology is one of the hottest investment sectors due to the constant innovation in this space. The obvious stock to consider is, of course, Apple, but it’s not the only game in town.
Consider, for instance, the manufacturing companies that make components for Apple’s iPhone or for virtual reality technology. Thousands of companies are involved in the making of these products, but you won’t know their names unless you do your research.
There’s always a race in this industry to come up with the next big thing. Paying attention to the smaller companies that are hungry and making names for themselves can pay off.
Over the last few years, we’ve seen people spend lots more money on vacations, adventure experiences, sporting events, and leisure activities.
Instead of spending discretionary funds on the biggest television or a new treadmill for the basement, consumers want to get out in the world and discover new things.
Consequently, stocks in the consumer discretionary stock market sector can be touch and go. Hospitality, travel, gambling, recreation, and food services can sometimes provide good opportunities for stock market plays.
If you follow me on Instagram (@TimothySykes), you might notice that I catalogue my own travels there.** I’m not the only one. Lots of people, from Millennials to baby boomers, have the urge to get out of their homes and explore the world. International stock markets might offer opportunities for investors who want to go that route.
Financials Sector Funds
The financials sector took a big hit post-2008 because of new regulatory oversight and stress tests that required banks and other financial institutions to mitigate risk and provide more protection for consumers. Some of those stressors are going away, so financials sector funds could be worth a look for investors.
I’m predicting some mergers and acquisitions in this sector through the end of 2018 and beyond.
Don’t just throw your money into a fund, though. Research it carefully to decide whether it offers the right balance of risk and reward for your particular trading strategy.
You might start to see that investment sectors overlap. For instance, utilities are heavily dependent on energy, which I’ll get to below. Crude oil price drops can put huge pressure on utilities, especially in areas where demand exceeds availability.
I don’t recommend putting money in utilities unless you find a stock that has a huge catalyst behind a predicted upswing.
Competition is fierce in real estate right now, which is why many retail real estate investment trusts (REITs) aren’t performing very well. However, REITs with properties in affluent and highly trafficked areas will always make money — which doesn’t mean their stocks will continually go up. It all depends on sentiment.
Despite the rapid growth of the e-commerce market, people still shop in brick-and-mortar stores. In many parts of the country, new commercial and residential developments continue to go up at lightning-fast paces as demand in desirable communities outpaces supply.
Health Care Sector Funds
The biggest growth I see in health care sector funds relates to technology-aided health care.
For instance, companies that create high-tech devices, such as wearables, for more efficient diagnostics and monitoring might provide good sector fund investments. It all depends on sentiment and catalysts, though, especially for day traders.
Lots of people assume they can safely invest in consumer staples stocks because, after all, staples are things we need. Companies in this space make toilet paper, food products, soap, and toothbrushes.
However, if you walk down the aisle at your local supermarket, you’ll notice that you don’t see just one toothbrush on the aisle. There are dozens from multiple companies.
Furthermore, sentiment is leaning more toward consumer staples that have small carbon footprints. In the packaged foods industry, consumers want whole foods, organic foods, and healthy foods.
Paying attention to these trends can help you invest more wisely in various investment sectors.
I already touched on energy, but want to mention a few more things about it …
Energy doesn’t just mean crude oil. It also means hydroelectric energy, solar power, and other alternative fuel sources. Furthermore, you have to consider regions. Sentiment is heavily biased toward U.S.-based production as well as domestic fracturing.
Energy is one of those sectors where you have to do even more research than you would for other investment sectors. You know that I’m always telling you to do your homework, but that’s doubly true if you want to invest in energy, especially if you’re inclined toward speculative stocks.
How to Choose Which Sector to Invest In
I’m not biased toward any one sector. I’m more focused on individual stocks and how they’re performing within specific windows of time. That’s how I make the majority of my profits. I’m looking for recognizable patterns to repeat so I can dip buy or short a stock based off a pump and dump.
However, that doesn’t mean I don’t pay attention to investment sectors and monitor their performance. If you’d like to focus your investments on a single sector, you need some foundation for monitoring that sector’s performance.
When should you invest? When should you steer clear? Focusing on research and knowledge will help you make more informed plays.
- Technical and fundamental analysis of the stock market: Follow the charts and pay attention to news. Know what’s happening in that sector.
- Pick the right stocks and their appropriated sectors: Don’t just assume that good sector performance correlates to good stock performance. That’s not always true.
- Evaluate liquidity and price: It always boils down to liquidity and price. Are there enough shares trading in the market? Does the price movement indicate a favorable outcome for your trade?
- Consider the ones that tend to bloom late: Picking a speculative stock within a well-performing sector can work to your advantage because fewer people are watching these companies.
The Bottom Line
I don’t necessarily advocate trading based on specific investment sectors, but knowledge is essential in the stock market. I want you to know as much about Wall Street as possible so you can spot the good plays from a mile away.
Learning about investment sectors teaches you how sentiment, catalysts, and news influence entire industries and how those factors can set up potentially good plays for your portfolio.
Even in a recession, certain stocks perform well. If you can find those, you can trade in any economic climate.
That’s my goal for you. Pretend you’re a retired trader, just looking for the best plays, regardless of whether you’re confining yourself to a single sector.
— Tim Sykes
Editor, Penny Stock Millionaires