Stan Weinstein describes selecting the correct stock market sector or group to trade as perhaps the most important criteria in the Stage Analysis process. He goes over many examples in the book where stocks from specific sectors gave vastly superior returns when compared to other sectors. This can even occur in an overall market that might be struggling. Sometimes a hot sector is so strong that it can be going up in a void where not much else is working.
The outperformance of a hot sector in a short period of time can be dramatic. Stocks in a hot sector can outperform by 7x or more in the same timeframe as other stocks. Often these sectors are smaller and newer than other areas of the market.
During my weekly process of analyzing the markets one key thing I’m looking for is a group of stocks making Stage 2 breakouts at the same time or around the same time. When that occurs it can be an early indication of a hot sector emerging where superior returns can be made. Volume is often a key indicator when this occurs and big volume will show up across many stocks in the sector which further emphasizes what is going on with the sector.
As Stan Weinstein says in the quote below a few sectors tend to have big returns each year in the markets and often the most important factor for any individual stock is the sector in which they belong.
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