Sector Selection Is the Key to a Win

When you're watching basketball, it's important to know which team is playing offense, which is on defense and, of course, which player has the ball. In the financial markets, the sectors also play offense and defense, as money gets passed among the players. Traders and investors who know which sectors are playing offense, which are playing defense and where the money is flowing in both positive and negative market environments can add nicely to their profits. Before we continue, though, let's define sector. An economic sector is defined by the type or area of business activity it supports in relation to the overall economy. The S&P 500, considered the benchmark of U.S. markets, is divided into nine sectors: financial, technology, energy, health care, materials, utilities, consumer staples, consumer discretionary, and industrials. Within each of these sectors, we find related industry groups. I've divided these sectors into two general teams: offense (i.e., sectors that generally do well in a bull market environment) and defense (i.e., sectors that generally do well in bear markets). To help define the sector players, I've identified them by their Select Sector SPDR ETF. Offense Consumer Discretionary Select Sector SPDR (XLY): This sector includes a variety of industry groups such as media, specialty retail, hotels, restaurants and leisure, automobiles, household durables, and diversified consumer services. When an economy is expanding, consumers spend more money on these items. The biggest holdings in this sector are Amazon (AMZN), Comcast (CMCSA) and Disney (DIS). Energy Select Sector SPDR (XLE): This important sector consists of crude oil and natural gas exploration, drilling, and other energy-related services. Companies in this sector typically thrive in strong economies. At the top of a market expansion, energy prices can skyrocket and cause inflation, which can eventually slow that expansion. Top components include Exxon Mobil (XOM), Chevron (CVX) and Schlumberger (SLB). Financial Select Sector SPDR (XLF): Financial industry groups include banks, brokerages, insurance companies and real estate investment trusts. These groups tend to flourish in relatively low-interest-rate environments, as consumers spend more and refinance more. Top holdings in this fund are Wells Fargo (WFC), JPMorgan Chase (JPM), Berkshire Hathaway (BRK.B) and Bank of America (BAC). Industrial Select Sector SPDR (XLI): This sector encompasses a wide swath of industries, such as aerospace and defense, construction, conglomerates, machinery, and transportation. Industrials thrive in muscular economies and generally suffer in weak environments. Top components are General Electric (GE), United Technologies (UTX) and Boeing (BA). Materials Select Sector SPDR (XLB): When economies expand, demand increases for the materials used for manufacturing products. Top holdings include DuPont (DD), Dow Chemical (DOW) and Monsanto (MON). Technology Select Sector SPDR (XLK): One of the largest sectors in the S&P 500, the technology sector takes in groups such as hardware, storage and peripherals, IT services, software, Internet services, telecom, semiconductors, communications, and electronic equipment. Top components in this sector are Apple (AAPL), Google (GOOG), Microsoft (MSFT) and Verizon (VZ). Nothing goes up forever, including bull markets. When the economy cools, investors head for safety. They typically take their money out of growth and cyclical stocks and place it in more benign (if less exciting) equities. The following sectors are considered to be defensive, and we see money flow into them during uncertain markets and contracting economic environments. Defense Consumer Staples Select Sector SPDR (XLP): This sector includes products and services that humans consider to be necessities -- namely, food, household products, beverages and personal products. Many of the companies in this sector also pay respectable dividends. Top holdings are Procter & Gamble (PG), Coca-Cola (KO), Philip Morris International (PM) and Wal-Mart (WMT). Health Care Select Sector SPDR (XLV): Industry groups in this sector include pharmaceuticals, biotechnology, healthcare equipment and healthcare providers. Please know that while this sector is considered to be defensive, we will always want our medicines, no matter the economy, so it can also thrive nicely in bull markets. Leading components in this fund are Johnson & Johnson (JNJ), Pfizer (PFE) and Merck (MRK). Utilities Select Sector SPDR (XLU): Electric and multi-utilities, independent power and renewable electricity producers, and gas utilities make up this sector. When bull markets soften into uncertain markets, this sector typically thrives. Utilities are usually the market's steady Eddies and pay investors substantial dividends, making them an ideal safe haven. (Keep in mind that in a volatile market downturn, utilities can also lose ground.) Top holdings include Duke Energy (DUK), Dominion Resources (D) and NextEra Energy (NEE). No matter the market environment, knowing which sectors play offense, which play defense and who has the money is a great way to earn more profits and truly enjoy the game.

Sector Selection Is the Key to a Win

Thoroughly examine your sector brackets for higher profits.

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