Sector Strength is one of three major considerations of profitable investing

3 profitable investing considerations are total stock market strength, sector strength and selection of stocks within each sector.

This page explains how to read the total market and sector strength charts found on the Sector Strength Charts page.

Each row on the charts page displays a specific aspect of market strength captured in 1 month and 6 month charts

Sector Strength Chart Sample

Sector Strength Chart Sample

The top row shows the total market strength using the symbol VTI.  VTI is the Vanguard Total Market Index.

The Total Market Index provides a broad look at the performance of the stock market as a whole.

VTI provides more useful market analysis information than any of the other market indexes.

Investors buy and sell VTI just like a stock.

The second row shows the market strength as represented by the S&P500.  The ETF named SPY is used for this analysis.  SPY represents the S&P500 accurately and is also purchased and sold just like a stock.

Rows 3 through 12 shows the charts for each of the tracked stock sectors.  Unique sets of stocks are assigned to each sector.  Each stock is assigned to only one sector.  There is no duplication of stocks across sectors.

Each row is sorted by sector with the sector symbol shown in parentheses:

  1. TOTAL MARKET (VTI)
  2. S&P 500 (SPY)
  3. CONS DISC (XLY)
  4. CONS STAPLES (XLP)
  5. ENERGY (XLE)
  6. FINANCIALS (XLF)
  7. HEALTHCARE (XLV)
  8. INDUSTRIALS (XLI)
  9. MATERIALS (XLB)
  10. REAL ESTATE (XLRE)
  11. TECHNOLOGY (XLK)
  12. UTILITIES (XLU)

Border color represents sector strength

Sector Strength Chart with different borders

Sector Strength Chart with different borders

The border of each row of charts can be a different color.

Both the 1 month chart and the 6 month chart border will be the same color in each row.

The chart border colors represent the following

  • Green – Sector is strong with demand higher than supply
  • Yellow – Sector is transitioning between Green and Red.
  • Red – Sector is weak with demand less than supply

Sector Strength transition

Sector Strength transition

Sector Strength transition

This analysis does not consider relative sector strength.

For example it makes no sense to own the best performing sector if they are ALL decreasing in price!

This supply vs demand analysis helps to avoid weak sectors, even in a strong overall stock market.

Sector strength is expected to change color as sector rotation takes place in the stock market and as the economy cycles through growth and contraction phases.

Sector strength typically transitions between strength and weakness over a period of several days.  This transition time period provides advance notice of strength changes and helps in holding the highest profitability positions in the strongest sectors for the longest possible time.

It is uncommon for sector strength to transition between Red or Green without being Yellow for at least a day.

When a sector transitions directly from Green to Red it is advisable to look for opportunities to adjust upwards the price level of stop-loss or profit-keeper orders.

When a sector transitions directly from Red to Green it is frequently profitable to go bottom fishing for strong stocks in that sector.

Its useful to view the total sector strength and each sector strength transition on the Sector Analysis Summary page.

Each Sector Strength chart tracks 3 items

Sector Strength Chart Line Example

Sector Strength Chart Line Example

Regardless of the chart time frame, the following items are on each chart for the closing value of each trading day:

  • VTI Closing Price (plotted against the left scale)
  • VTI OBV 20 day moving average (plotted against the right scale)
  • VIT OBV 3 day moving average (plotted against the right scale)

The Sector Strength Assessment Table shows how each sectors strength is calculated.

Because there are two scales on the charts it appears in some cases there is a difference in the lines and potentially the relationship between them.  However, even though the chart might appear different they do reflect the correct values.

Caution on comparing OBV

Be cautious about comparing OBV values across charts from different chart providers.  The actual value of any OBV line – and any calculations derived from its value (like moving averages) – depends on when the calculations were started.

The important characteristics of OBV are the absolute and relative changes, not the actual numbers themselves.  This is because OBV is accumulated every day.  So the actual numbers depend on when the series was started.  The sector charts on profitable-investing.com were started in late 2016.

When using OBV for analysis the important aspect is the direction of the lines and their relationships to each other.

Tips on using the chart to gain insight on sector strength

Stock Strength Detail Guide

Stock Strength Detail Guide

For detailed information on the exact values of the line on any date, place your pointer near the date of interest.  When you do this a detail box will appear showing the exact values of each line.  The detail box follows the pointer if moved to view different dates.  This is an easy way to gain insight as to the exact value of any line for any date on the chart.

Use the sector price line (red) to determine if an uptrend (higher highs & higher lows) are occurring or if in a downtrend (lower highs & lower lows).  Remember if you want the exact value to use the left scale.  But in reality the scale doesn’t matter.  The technique is to look for nice buy points or base breakouts.

Sector Strength Chart Lines

Sector Strength Chart Lines

View the OBV moving average lines (blue & yellow) to view how the short term average (yellow) is relating to the longer term average (blue) trend.

The longer OBV moving average line (blue) is the major trend driver.  If that line is going up is shows demand for that sector is increasing.  If that line is going down it shows demand for that sector is decreasing.

Long moving average is most important

The direction of the long moving average restricts the assessment of sector demand.

The sector strength is only Yellow or Green if the line is increasing.

The sector strength is only Yellow or Red of the line is decreasing.

The selection between the two colors of each direction is determined by the direction of the shorter moving average.

View the Sector Strength Assessment Table for details on how the strength and color of each sector is determined.

Sector Strength updated daily

Sector strength charts and summary tables are updated minutes after the close of each market day.

Be sure to visit frequently or subscribe for useful investing updates.