Understanding Market Direction And Sectoral Analysis For Profitable Trading

In technical analysis and chart reading, the general market direction is said to make up 50% of a stock’s move. You want to be investing in stocks during a bull market, when the market is in a confirmed uptrend. This confirmation usually occurs when a major index like the NGX All-Share Index follows through on day four, or later after its rally attempt.

The first two or three days of a rally are normally disregarded, as the rally has not yet proven that it will succeed and follow-through with power and strong conviction.

I was asked in one of the classes by participant how to do sector analysis in your trading activities. This is a broad topic and there are many different ways to skin this cat.

Lately, we have been using it in a very specific way, knowing that our NGX index is mainly controlled by six highly capitalised stocks across telecommunication services, energy, industrial and consumer goods.

However, let’s talk about sector analysis, how I use it, and then a sector analysis example, or two.

Sector Analysis Meaning

This is simple and straightforward. Market watchers group the stocks (or more accurately, companies) in the market into the various industries or sectors they are in. It is a way to organize the stock market, and it makes it easier to relate value among similar companies.

The market is commonly divided into, financials, used to describe banking, insurance and other financials services providers, consumer goods, agriculture, construction/real estate, ICT, healthcare, oil/gas, services and others.

Why Sector Analysis?

For one, at its most basic level, this is a way to see which sectors are doing well. And in fact, a way to further simplify this is basically to divide the market into two: Growth stocks and Cyclicals.

We have had many a discussion on different platforms talking about which of those was in favour at the time. Generally, these talks are common when interest rates are changing because low rates are great for growth companies; and when rates go higher, cyclicals tend to rise in share price.

That said, the more specific sectors mentioned above each benefit or hurt by interest rates and other macroeconomic factors, and each has its own sort of “market personality.” And thus, many stock traders will look toward what is changing in the economy to switch in and out of different sector to benefit from the current macroeconomic landscape.

When we analyse the impact of rising interest rate and the high inflationary environment, in addition to technicals and volatility considerations, we look at how a stock fares within its own sector. By that, we mean if it can be considered for ‘buy,’ because at this point fundamentals and technical are use for decision making. So, we look to see if there’s support and that no “volatility events” like earnings are imminent. But then we will look towards the sector to see if it gives us reason to believe the stock might have some buoyancy. Let me show you what I mean.

NGXASI (Opening chart)