How to Forecast Stock Sector Performance

A “stock sector” is a subset of the larger stock market, comprised of a group of related stocks that revolve around a central idea. Examples include oil and gas, automotive, agriculture, technology and shipping companies. Forecasting market trends for stock sectors is a little easier than predicting the movement of the market as a whole, since a knowledgeable specialist will be able to focus on how different forces impact one particular area. The more specific and narrow the stock sector focus, the more reliable the data that can be brought to bear to forecast future price movements.

Research the stock sector that interests you. Do not attempt to forecast until you are thoroughly familiar with the sector. Varying economic forces can affect stock sectors in different ways. Established, major corporations like Wal-Mart and Target are safe havens during economic hard times, while small cap stocks suffer. The main focus in forecasting sector performance is to grasp how external forces and factors impact a given sector.

Consult your indexes daily. A stock index is the digest of a specific stock sector. It is organized around a representative sample of the stocks making up the sector. This is your main guide and source of data to use in forecasting. Most sectors, including, oil and energy, agriculture, biotech and industrial, are represented by at least one index.

Study and master regression analysis. Stock forecasting is far more difficult without statistical regression models. Modern software packages such as SPSS offer an easy-to-use and user-friendly interface. Accurate forecasting lies in the ability to use regression models to your advantage. Regression allows nearly unlimited variables in making connections between different economic scenarios and your chosen sector. In a regression analysis, you can plug in many variables, such as inflation, fuel prices, war, interest rates, bond prices and consumer debt, and then measure their influence over the movement of your sector. The more variables you use, the more reliable your data and the more accurate your forecasts will be.

Follow political developments. These events have a great impact on macroeconomic variables. It is one thing to focus on a sector area and another to see the broader picture. You must balance both. Political developments will give indications of how policies on taxes, inflation, foreign policy, the prospect of war, consumer debt and federal borrowing will impact and influence your sector. If your sector is subject to political headwinds, following these developments becomes more important.

Watch currency relationships. It is not sufficient to merely follow the basic fiscal policies of your home government; it’s just as important to grasp the fluctuations of relevant currencies. For example, the oil and gas sector is highly politicized and currency-sensitive. What happens in the Middle East, Russia and Central Asia influences this sector. Keep an eye on the value of these countries' currencies and foreign policies; both are immensely important in forecasting this sector.