Identifying Winning Sectors with a Data-Driven Approach
Large institutional investors, often referred to as "smart money," tend to accumulate positions in sectors they believe will outperform.
This accumulation can often be observed through increased trading volume, potentially before significant price appreciation becomes apparent to the broader market. By analyzing these patterns, both individual investors and professionals can gain insights into potential sector leadership.
Let's explores a methodology centered on sector-wide price-volume distributions of constituent stocks to pinpoint sectors that may be poised for growth.
Sectors and Industries
Let's begin with a look on the playground. Stocks listed on the exchanges are grouped into sectors and industries based on their line of business.
By understanding the sector and industry a company operates in, you can gain a better insight on the company's potential growth, competition and the overall health of the industry.
Here is a table that lists the sector, industry and the sub groups the listed companies belong to.
Data update on:
Distribution of companies
If you are curious about the number of companies belonging to particular industry subgroup then here is the table depicting the same.
I am presenting this distribution so as to help you understand which subgroups are over crowded and which are not. The sweet spot is the subgroups that are neither overcrowded (greater than 100 companies) nor too sparse (less than 5 companies).
The "sweet spot" of 5-100 companies offers sufficient data for reliable analysis, while remaining specific enough to yield actionable insights.
Step 1: Screening for Substantial Volume Increase
When the aggregate volume of sector constituent stocks increases with overall price increase, it's a bullish sign. Similarly, if there is a volume surge with overall price decrease of constituent stocks, it's a bearish sign.
Emerging Sector
Here is a table that lists sectors that have experienced a significant surge in total trading volume compared to their historical averages.
For our case, I will quantify "significant surge" as today's volume greater than 100% of 50-day average volume (today's volume > 2 time 50 Day Avg Volume). You can click on individual rows to get constituent stocks data. This screening helps identify sectors with unusual trading activity, indicating potential shifts in investor interest and capital flow.
Emerging Industry
Let's go a level down and do the same analysis for Industries.
This table lists Industries that have experienced a significant surge in today's total trading volume (more than 2 time 50 Day Avg Volume) compared to their historical averages. You can click on individual rows to get constituent stocks data.
The surge in volume should be matched with what's happening with price. If price increase accompanies overall volume increase, then one can be bullish on the industry and vice versa.
Emerging Industry Group
Moving further down the hierarchy, let's do the same analysis for Industry Group.
This table lists Industry Groups that have experienced a significant surge in today's total trading volume (more than 2 time 50 Day Avg Volume) compared to their historical averages. You can click on individual rows to get constituent stocks data.
Again, the surge in volume should be matched with what's happening with price. If price increase accompanies overall volume increase, then one can be bullish on the industry group and vice versa.
Emerging Industry Subgroup
Let's go a level down further and do the final analysis for Industry Subgroup.
This table lists Industry Subgroups that have experienced a significant surge in today's total trading volume (more than 2 time 50 Day Avg Volume) compared to their historical averages. You can click on individual rows to get constituent stocks data.
The surge in volume should be matched with what's happening with price. If price increase accompanies overall volume increase, then one can be bullish on the industry and vice versa.
As the list is quite shorter now, consider what constitutes 'enough data' or 'sufficient specificity' for your particular analysis and use it as a guiding principle for decision making.
Step 2: Validating Volume Distribution
After identifying sectors with substantial volume increases, analyze how this volume is distributed among individual stocks. Determine if the volume surge is:
- Concentrated: Focused on a few dominant stocks, potentially due to company-specific news.
- Evenly distributed: Spread across a larger number of stocks, indicating broader interest in the sector.
Even volume distribution is a better predictor of a sector-wide tailwind, reflecting collective conviction rather than isolated reactions, indicating more robust and sustainable trends.
Step 3: Analyzing Price Distribution
Final step is to examine price movements within sectors with substantial, evenly distributed volume increases. Check for:
- Overall Price Increase: Weighted average price change compared to the previous trading day.
- Price Distribution: Determine if price increases are concentrated in a few stocks or evenly distributed across the sector.
An even distribution of price increases, mirroring volume distribution, strengthens the case for sector-wide positive sentiment indicating a fundamental shift in investor perception, making the sector a potentially attractive investment option.
Spotting the Next Winning Sector
A systematic approach is necessary to identify potential winning sectors in the stock market.
This methodology, focusing on substantial and evenly distributed increases in trading volume and price, offers a valuable framework. By screening for volume surges, validating their broad distribution, and confirming price appreciation, investors can identify sectors with genuine shifts in investor sentiment.
I will leave you with the Systematic Sector Analysis Framework. Consider it as a guide, helping you map the sector-wide activity by highlighting key volume and price changes.