Stock Sectors and Industry Groups

An understanding of these inter-market relationships also sheds light on the interaction between the various stock market sectors and industry groups. The stock market is divided into market sectors which are then subdivided into industry groups. These market categories are influenced by what's happening on the inter-market scene. For example, when bonds are strong and commodities weak, interest rate-sensitive stock groups-such as the utilities, financial stocks, and consumer staples-usually do well relative to the rest of the stock market. At the same time, inflation-sensitive stock groups-like gold, energy, and cyclical stocks-usually under perform. When commodity markets are strong relative to bonds, the opposite is the case. By monitoring the relationship between Treasury Bond prices and commodity prices, you can determine which sectors or industry groups will do better at any given time.

Since there is such a close relationship between stock market sectors and their related futures markets, they can be used in conjunction with each other. Utility stocks, for example, are closely linked to Treasury Bond prices.  Gold mining shares are closely linked to the price of gold. What's more, the related stock groups often tend to lead their respective futures markets. As a result, utility stocks can be used as leading indicators for Treasury Bonds. Gold mining shares can be used as leading indicators for gold prices. Another example of inter-market influence is the impact of the trend of oil prices on energy and airline stocks. Rising oil prices help energy shares but hurt airlines. Falling oil prices have the opposite effect.