Why Sector Selection is the Key to Success in Today's Trader's Market Conditions
- Anita Arnold
- Sep 15
- 5 min read
Updated: Sep 19
If you've ever watched uranium stocks all jump together and wondered "Why didn't I see this coming?", you're experiencing one of the most fundamental truths in momentum trading. As Gary Glover recently explained during his market analysis, "Sector selection is the key to success" in these current trading conditions. This isn't just market commentary – it's backed by decades of research from legendary traders Thomas Bulkowski and Stan Weinstein.
When Gary discusses rotating between consumer staples like Wesfarmers and Woolworths, construction plays like Reece, and defensive positions like Domino's Pizza, he's demonstrating a sophisticated understanding of sector dynamics that can transform your trading results.
Understanding Why Stocks Move in Packs
The foundation of successful sector selection lies in understanding market psychology. As Gary observes, "stocks move in packs" – but why does this happen?
Research by Thomas Bulkowski reveals that the market accounts for 31% of price fluctuation in stocks, while the economy and industry factors each contribute 30-35%. This means that understanding sector dynamics is often more important than individual company analysis.
Stan Weinstein's stage analysis framework provides the psychological explanation. When institutional investors rotate capital, they don't move stock by stock – they move sector by sector. Weinstein's work was rooted in observing the psychology of institutions — how they accumulate, distribute, and dump positions.
This is exactly what Gary demonstrates when he discusses the current market environment where "the NASDAQ is underperforming" while "the Dow has really been humming". This isn't random – it's systematic sector rotation in action.
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The Research Behind Sector Selection Success
Two of the most respected names in technical analysis have provided frameworks that complement Gary's approach perfectly.
Thomas Bulkowski's Statistical Approach
Bulkowski's extensive research on sector rotation strategies reveals a counterintuitive finding. ETFs with a middle rank of 5 (out of 9 funds) had an average annual gain of 9.91%. That's 116% better than the best performing funds and 86% better than the worst performing funds.
This research supports what Gary demonstrates when he focuses on sectors that aren't getting the headlines but show technical strength. The consumer staples sector, featuring companies like Wesfarmers and Woolworths, represents exactly this type of "middle-tier" opportunity that Bulkowski's research validates.
Stan Weinstein's Stage Analysis Framework
Weinstein's approach divides market movements into four distinct stages, helping traders identify optimal entry and exit points. The framework offers a clear explanation for portfolio adjustments by recognising when sectors are transitioning between stages.
Weinstein splits market behavior into four distinct stages: basing, advancing, topping, and declining. He teaches how to identify these stages using price, volume, and relative strength.
Gary's analysis perfectly demonstrates this when he discusses how "growth will need to see inflation at ease first before it can get going" while value sectors continue to perform. This represents sectors at different stages of Weinstein's cycle.
Practical Sector Selection in Current Market Conditions
Consumer Staples: The Defensive Transition
Gary's analysis of Wesfarmers and Woolworths illustrates how to identify sectors entering Weinstein's Stage 2 (advancing phase) while still ranking in Bulkowski's middle tier.
When Gary notes that "staples is a good sector to be in, pretty safe", he's identifying exactly what both research frameworks suggest – sectors that provide stability while positioning for growth.
Wesfarmers shows the technical characteristics both experts advocate for:
Breaking above previous resistance levels
Volume accumulation at lower levels
Building a base formation over time
Construction: Contrarian Opportunities
The construction sector examples – Reece and Johns Lyng Group – demonstrate Bulkowski's contrarian approach to sector selection. This strategy is bottom fishing, picking the worst performing sector this quarter and hope performance rebounds the next quarter.
Gary's observation that construction stocks "have really been hammered" but are now showing "signs of probably more building a base" aligns perfectly with Bulkowski's finding that bottom fishing and buying fallen angels can provide superior returns.
Technology: Recognising Stage Transitions
Gary's analysis of Domino's Pizza exemplifies how to identify individual stocks within sectors that can outperform during different economic conditions. His comment that "maybe this is one of the growth stocks that can do well in a high inflationary period" demonstrates the nuanced sector analysis both Bulkowski and Weinstein advocate.
The Psychology of Sector Rotation
Understanding why sectors rotate requires grasping market psychology. Weinstein's mantra: "Don't be a fundamentalist one week and a technician the next." Consistency matters.
Gary demonstrates this consistency when he explains his portfolio management approach: "I did cut a few stocks that weren't performing well in my portfolio and then added to the ones that were performing well and looked better".
This systematic approach to sector selection eliminates emotional decision-making and focuses on what both research frameworks prove: following sector momentum and relative strength provides better long-term results than stock-picking in isolation.
Common Sector Selection Mistakes to Avoid
Many traders struggle with sector selection because they focus on individual companies rather than understanding the broader sector dynamics. As one FMP member recently shared: "I was tired of buying stocks just as they peaked." This frustration stems from not recognising sector rotation patterns.
The key mistakes to avoid include:
Fighting the Sector Trend: When Gary notes that "growth stocks there, so those are ones I probably just need to temper", he's demonstrating how to avoid fighting sector headwinds.
Ignoring Relative Strength: Relative strength isn't a lagging signal — it's a filter for trade selection. A breakout in a stock with poor RS is suspect.
Poor Timing: Bulkowski's research shows that changing sector funds every six months worked best for rank 2 funds, emphasising the importance of timing in sector rotation.
Implementing Sector Selection for Trading
For Australian investors, Gary's approach provides a practical framework for implementing sector selection strategies:
Monitor Sector Relative Strength: Focus on sectors showing technical strength relative to the broader market, like the consumer staples Gary highlighted.
Understand Economic Cycles: Gary's observation that "if inflation hangs around, NASDAQ might underperform" shows how economic conditions drive sector performance.
Use False Breaks as Entry Signals: Gary's analysis of Woolworths' false break demonstrates how sector leaders can provide high-probability entry points.
Build Positions Systematically: Rather than making large single bets, build positions in sectors showing sustained relative strength over time.
Key Takeaways
The insights from Gary's analysis, combined with Bulkowski's statistical research and Weinstein's stage analysis, highlight why sector selection remains crucial in current market conditions. Remember that "sector selection is the key to success" requires understanding both the statistical edge provided by proper timing and the psychological dynamics driving institutional money flows.
For Australian investors, recognising that "this is looking quite normal for a mid-term year" provides context for why systematic sector selection strategies outperform individual stock picking during these volatile periods.
The combination of Bulkowski's middle-tier contrarian approach and Weinstein's stage analysis creates a powerful framework for identifying sectors transitioning from accumulation to advancement phases – exactly what Gary demonstrates through his consumer staples and construction sector analysis.
FMP members receive additional insights through our weekly 3030 Report, released Fridays, featuring detailed analysis of momentum leaders and Launch Pad opportunities. Members can also submit specific requests for sector analysis.
Continue developing your momentum trading education by exploring our related content on relative strength analysis and market timing strategies.
Disclaimer: Finer Market Points Pty Ltd, CAR 1304002, AFSL 526688, ABN 87 645 284 680. This general information is educational only and not financial advice, recommendation, forecast or solicitation. Consider your objectives, financial situation and needs before acting. Seek appropriate professional advice. We accept no liability for any loss or damages arising from use.
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