Sector analysis: focus on strong sectors
With sector analysis investing, you focus on strong sectors rather than weak laggards. From sector to ETF to the strongest stocks.
- Identifying strong sectors with RMS studies.
- Measuring momentum over multiple periods with the Topscope.
- Working top-down: from sector to ETF to stock.
Revisit Sector Analysis investment course
Many investors tend to weak stocks or to buy laggards. “The sector has already risen 100%, I’m not getting into it anymore,” is the common refrain. While precisely those strong sectors and strong stocks the spine forming a healthy portfolio.
In this lesson, Mark delves deeper into sector analysis investing: how to recognize strong sectors, why you are better off focusing on winners rather than laggards, and how you with RMS studies and the Topscope in TransStock you see at a glance where the real momentum lies. From those sectors, you then move on to the best ETFs and ultimately to the strongest stocks.
This article condenses the essence of the video into a structured guide. It is ideal for reviewing everything at your leisure afterwards and applying it step-by-step to your own portfolio. Would you like to explore the basics of investing first? Then also take a look at our guide for those starting to invest.
Go for strong stocks in strong sectors. That is much more pleasant to invest in, and much more logical if you assume the market will continue to rise.
Chapters
- 00:00 – Why sector analysis determines returns
- 02:00 – Step 1: Building an efficient sector and ETF selection
- 03:55 – Step 2: Measure Sector Strength with RMS (Relative Map Strength)
- 07:54 – Step 3: Measuring momentum and trend strength with Topscope
- 12:08 – From sector to shares: why you never start with a share
- 15:59 – Practical example: which sectors are strong (utilities, healthcare, tech)
- 18:06 – ETF holdings as shortlist for top stocks
- 23:00 – Case Europe: sectors & strengths via STOXX 600
- 26:02 – Conclusion: sector analysis as a fixed investment routine
Why sector analysis is essential for your portfolio
A strong market is supported by a limited number leading sectors. Within those sectors, most stocks perform remarkably well: not 1 in 10, but often 7, 8 or even 9 out of 10 are in a strong upward trend.
Yet many investors try to stragglers to buy: stocks that remain weak because “the rest have already risen too far”. In practice, those weak stocks often remain weak, precisely because the sector they are in has no tailwind.
What is sector analysis in investing?
At sector analysis investing do not start from an individual stock tip, but from the bigger picture:
- Which tasks and skills are truly crucial to success in this role and which baggage you can eliminate. sectors performing well?
- Which tasks and skills are truly crucial to success in this role and which baggage you can eliminate. sector ETFs are the clear winners?
- Which tasks and skills are truly crucial to success in this role and which baggage you can eliminate. shares within those ETFs are the strongest?
So you work top-down:
- Make a selection with sectors, sector indices or sector ETFs.
- Compare their performance through a RMS study (relative map strength).
- Use the Topscope to look at multiple periods at the same time.
- From there, select the strongest ETFs and then the strongest stocks.
This is how you get from and insight to in actionInsights into strong sectors become a concrete list of stocks that you can analyze further technically.
Build selection
Create a folder with sector indices (e.g. STOXX 600), sector ETFs or country indices as a basis for all your further sector analysis.
RMS study
Put all sectors in one graph and pay attention higher peaks and bottoms — this is how you see which sectors are truly leading.
Topscope
Meet momentum over multiple periods at the same time (1, 3 and 9 months) and sort from strong to weak.
Strongest stocks
Choose the best performing stocks and apply your own technical analysis.
Step 1: Build a selection of sectors and ETFs
Sector analysis starts with a good selectionYou create a separate folder or list with:
- sector indices, for example the STOXX 600 sector indices (10–12 major sectors);
- or a basket with sector ETFs, for example Global X or iShares ETFs;
- possibly supplemented with country indices if you want to compare geographically.
Mark often prefers ETFs listed on the German stock exchange: clear volume and a trusted market. Many ETFs have multiple listings (euro, dollar, London, Zurich, Paris, Amsterdam, Milan, …). In his selection, he usually takes the main listing up, so that the analysis remains clear.
Such a selection forms the basis of all your further sector analysis. You use the same list time and again whenever something significant happens in the market: a sharp correction in commodities, a rally in technology, a rotation towards defensive values, and so on.
Step 2: Measure relative strength with an RMS study
In the second step you view that selection with a RMS study (relative map strength) in TransStock. This plots the performance of all selected sectors or ETFs on a single chart over a specific period.
Each sector gets its own line. Not only the height of the line is important, but especially the ratio of tops and bottoms throughout time:
- makes a sector a higher peak than a few months ago;
- or will it remain below its previous peak;
- the line has been there for a long time flat and low (weak sector);
- or is he clearly sliding upwards and he sets higher ground.
In an example with the American Select Sector SPDR ETFs we see that some sectors (such as healthcare en real estate market) have been moving flat and weakly for quite some time. Those are sectors where you should not be for the time being. Other sectors are drawing higher highs and remain clearly at the top of the chart: those are the interesting candidates.
It is important that you do not just look at one year, but also at shorter periods, for example 3 monthsSector rotation can happen quickly: a sector that was weak for a long time can suddenly start to break out – and you see this when the line finally rises above a former peak.
Step 3: Topscope – multiple periods in one image
One disadvantage of classic performance graphs is that you often multiple graphs next to each other must look at: one month, three months, six months, one year… The Topscope solves that by showing multiple periods in a single overview.
In the Topscope, each ETF or sector receives one horizontal lineThere are small symbols on that line:
- a cross (x) for the performance over 1 month,
- a dot (●) for 3 months,
- a triangle (▲) for 9 months (or any other period you set).
The vertical axis shows the percentage performance. This immediately shows:
- or a sector consistently strong is (all symbols well above zero);
- whether it only looks good in the long run, but recently impaired;
- if he has been for months little moves (all symbols close to the zero line).
A sector such as XLC (Communication Services) might, for example, be +20% over 9 months, +10% over 3 months, but slightly negative over 1 month. XLK (Technology) would then be positive over all periods. In that case, it is momentum stronger today at XLK then at XLC.
Sectors with a very narrow range, such as XLB In the example, they have barely moved for months. They are not immediately interesting, but as soon as the cross (1 month) suddenly jumps far above the zero line, you have a clear outbreakThat is the type of movement you can set an alarm for.
The power of Topscope is that you can sort the selection with a single click: from strongest to weakest sector over 1 month, 3 months, or 9 months. This way, you see immediately where you can expect the highest return today.
Not a little bit everywhere, but focus on the strongest sectors
Classic advice from banks often goes like this: “You need to have a little bit invested everywhere.” In practice, that also means putting money into sectors that are doing nothing. Mark turns that around:
Diversify within the strongest sectors, not across all sectors at once.
Suppose you sort the Topscope by 3 months and you see that four sectors are at the top: utilities (XLU), communication services (XLC), healthcare (XLV) en technology (XLK)Then, for example, you choose the three strongest at that moment instead of having something in all ten sectors.
You then diversify:
- over regions (for example, one stock from the US, one from Europe, one from Asia);
- and over Market capitalization (small, medium and large companies);
- but within sectors and ETFs that positive momentum to show.
Thus, each position is based on a combination of strong stock + strong sector + positive market sentiment.
From sector to ETF to individual stocks
Instead of starting with a random stock, Mark always starts from sectors and sector ETFsThe reason is simple:
- ETF providers already have a pre-selection made from quality companies;
- you can immediately see which basket as a whole performs strongly;
- you can then best performing stocks within that basket take out.
A practical method:
- Choose a strong sector ETF (e.g. Global X Blockchain ETF).
- Go to the provider's website and see the top 10 holdings and the full list.
- Place those shares in a custom selection in TransStock.
- Compare them again with a RMS study or Topscope.
This is how you go from strong sector → strong ETF → strongest stocks. Instead of following the average ETF, you even try to surpass by selecting only the best stocks from the basket.
Do you like working with clear technical tools? Then you can TransStock investment software use to go through this process of sector analysis, RMS and Topscope step by step.
Example: European sectors and Christian Dior
On the basis of the STOXX 600 sectors Mark is also looking at the European market. In the short term (1 month), for example, Food & Beverage, Healthcare en Personal & Household Products at the top of the list.
By then inside Personal & Household Products to compare the individual shares with a Price 100 chart, jumps Christian Dior Out: the stock was relatively weak for a long time, but is now clearly starting to break out.
Technically it looks like this:
- the stock breaks above an important resistance out;
- nadia test the price that zone again acts as support;
- if the price remains above that, then that is a valid breakout and possible entry point;
- if the price falls below it again, the same level acts as stop.
This illustrates how you combine sector analysis with classic technical analysis (support, resistance, gaps) to make structured decisions.
Strong sector, strong stock: why that makes investing so much more relaxed
It is tempting to buy a stock that has just received a notable news item or contract announcement. Sometimes the price shoots up 10–15% and it seems like an excellent entry point. But if the underlying sector remains structurally weak, that gain can disappear again within a few weeks.
Reversed: a strong share in a strong sector has the wind at its back. If you expect the stock market in general to continue rising for some time, it is logical that the strongest stocks in the strongest sectors will continue to follow that rise – or even outperform.
Such a stock may no longer rise as spectacularly as in the early stages of the trend, but it often remains at least match the benchmark, while weak stocks can continue to struggle for months before finally catching up.
From insight to return: the step-by-step plan
Sector analysis investing only becomes powerful when you do it fixed routine makes of. Mark summarizes the process in four steps:
- Make your selection. Sector indices, sector ETFs, country indices or a combination thereof.
- Analyze with RMS. Look at relative performance and pay attention to sectors that are making higher highs.
- Focus with Topscope. Look for consistently strong sectors over multiple time periods and for clear breakouts.
- Select strong stocks. Within the strongest sector ETFs, you choose the best-performing stocks and apply your own technical analysis.
By sector analysis, RMS, Topscope and a clear selection process By combining these, you build a portfolio driven by the strongest market trends. Less gambling on laggards, more riding the wave of proven strengths – that is the core of structured and calmer investing.
Deepening your understanding of technical analysis
Would you like to combine this approach with visual timing techniques? Then also read the previous lesson about quadrant analysis and smarter investing without noise, where you will learn how to further refine entry and exit moments.
Are you just starting out on the stock market and do you want to understand the basics of risk, diversification, and order types first? Then go to Investing for beginners.
Sector Analysis Investing - FAQ
De three-out-of-four rule means that you apply the quadrant analysis to four different time periods (for example 1 month, 6 months, 1 year and 4 years). For dynamic and neutral investors it is ideal if at least three out of four graphs a green signal This way, you avoid positions that go against the larger trend.
This publication is for educational and informational purposes only. It does not constitute an invitation to buy or sell, nor does it constitute personal investment advice.
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