Playing Sectors

When you study sectors moves over a period of time, you find some interesting things which again can help you design a better trading system. While most people have generalised knowledge about sector, if you can find sector specific behaviour then you have an edge.

There are always problem with sector based strategies as many new stocks are lumped in to some existing sectors and sector behavior evolves over a period of time. For example many sector grouping services lump the exchanges under business services sector, while they are a category by themselves. So when looking at young stocks I always look at its sector skeptically.

Now having studied earnings and momentum based strategies on sectors, there are couple of unique behaviours you will find which one can factor in to your decision making. Some of these findings are in public domain, but if you do your own studies you would find some sector specific exploitable anomalies. I have found few such anomalies which are not in public domain.

While I do not want to talk about them, some reasonably common knowledge ones are worth studying also. For example the retail sector has a very unique behaviour and your earnings and momentum models need to factor that in. I am perfectly happy to buy a relatively low relative strength retail play as my studies show buying at such juncture is more profitable than buying at high relative strength. Shorting retail sector also is profitable because retail trends generally tend to persist because of the nature of sector where if you get your strategy wrong, it takes lot of time to reverse that. Retail sector also shows predictable calender tendencies.

The technology sector is best for momentum trading. I am perfectly happy to buy a technology play with low earnings , if it has high relative strength. Again this has to do with unique nature of the sector. Biotechs are best bought on catalyst. Most of them will have an intense burst of price activity driven by news. If you chase momentum without catalyst in this sector , many times you end up buying the top as the burst in price is primarily driven by future expectations. Also you seldom find a biotech with good earnings. The biotechs which make 100% plus kind of moves in few months in one single intense burst have no revenue and no earnings.Some sectors are best played using value based strategies.


Some sector anomalies have persistence, while others stop working as more people figure out the same things. . So if you focus on finding sector anomalies, you get a unique perspective which most people randomly chasing chart patterns or indicators or quantitative techniques lack. If you can isolate a sector behaviour, you have an exploitable edge.