Know Your Sectors

Not very long ago, not many of us had ever heard of “Coronavirus.” Now it’s all over the news. And I’m sure you’ve seen the effect the scare had on the stock market…down hundreds of points!

But why should that be so? Because the threat of contagious illness has direct bearing on the fortunes of many kinds of businesses, as reported by Forbes.com:

Several different groups of stocks were particularly hard hit by concerns about the financial fallout of the coronavirus. Airline stocks plunged in premarket trading, with Delta, United and American each dropping more than 3.6%. With the coronavirus set to heavily impact China’s tourism industry during a crucial time of year (the Lunar New Year), stock prices for big casino and resort operators also took a nosedive. Shares of Las Vegas Sands fell 7.7%, MGM Resorts by 5.2% and Wynn Resorts by 8.8%. Travel stocks, like Expedia and Marriott International, fell around 4%. Tour and cruise operators, such as Carnival and Royal Carribbean Cruises, were down 3.8% and 4.8%, respectively. Even some consumer goods stocks, like those who have substantial business in China, were also affected. Apple was down 2.5%, Disney 2.8% and Nike 3.6%.

What’s our point for bringing up this example? To illustrate the importance of the trading maxim – Know Your Sectors!

Sectors are groupings of stocks that share common characteristics. Some examples are Industrials, Health Care, Precious Metals, Consumer Staples, etc. Understanding how world events, consumer behavior, and other factors might affect a particular sector can give you insight into how to trade stocks for companies in that sector. Given the challenge of following every sector in our complex world, many traders choose to focus on closely following just one or two sectors.

Fact is, every day, all day, there is world-wide activity that has direct effects upon these stock sectors. To maximize your trading success, you need to understand these dynamics. It’s the reason behind the age-old investment wisdom “invest in what you know.”

Understanding how world news can affect certain businesses – and by extension their stock prices – can provide insights on what to trade and when to trade. Bottom line, if you want to increase your trading success – Know Your Sectors!