Today's Quote: “There are two times in a man's life when he should not speculate: when he can't afford it, and when he can." Mark Twain.

Today we move on to the 4th list which is going to be the use of sector lists. We will discuss this today and tomorrow. Today we will go over some basics and why we are interested in breaking things into sectors.

First of all, what really moves the stock market is big money. Mutual funds, pension funds, hedge funds are all top of the list of big money spenders. When they ‘buy’ they typically don’t go after one stock, they go after a sector. They spread the risk around in case one individual stock has a bad earnings statement, accounting problems, or anything else that may cause a big move.

Second, you may have wondered about something. In a strong bullish market, such as the one we have experienced, there may be long series of time where the market seems to never pull back. An awful lot of money changes hands from day to day yet money never seems to come out of the market. If you ever wondered what that money is doing it is usually rotating among sectors. If you look at the charts of individual sector as you will often see bull market spare markets and pullbacks happening all on an individual basis even though the market as a whole may look like it's moving up in a very smooth manner. This "sector rotation" is what can be used to get in and out of the market when there appears to be no entries.

This flow of money is also what gives us the opportunity to find pockets of strength. You can be looking at one of the strongest stocks in the market, but on any given day it may be simply taking a “day off". It is not actively being sought every day and if you are looking at the wrong stocks on the wrong day you can have a frustrating experience. By looking at sectors in general we get a feel for where the money is flowing; into what stocks and out of what stocks.

Once we know what sectors are strong and weak, our job then is to find the individual issues inside a sector that may be best to play out our strategies. This is known as zooming down to the individual stocks inside the sectors that have our interests. How we go about organizing all this is what we will focus on in tomorrow's lesson.