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Top-down analysis to Locating the Appropriate Stocks and Sectors

The top-down stock investment plan focuses on finding out the state of the economy, the strength of various sectors and then selecting the hot stocks in those sectors to get the highest possible returns. This article will guide on how t identify the hottest sectors at the top of the market and the means to identify the hot stocks within those sectors with the highest odds of maximizing returns.

If your analysis of the market has come up with results that the market is in an uptrend and with high odds that it will stay this way for a period of time, you want to purchase stocks with the massive potential to be the best in the uptrend. You should be aware that the market moving up is not an indicator that all stocks will perform well, and some may considerably outperform others.

Selecting the Right Sectors

If the market is moving higher, we can start searching the various sectors to identify the ones that will give us the greatest odds for profits. Particular sectors perform better than others thus if the market is moving higher we aim to purchase stocks that are performing the best. Basically, we aim to invest in sectors that are performing at the highest level in the market.

To locate the hottest sectors, we require taking into account many time frames. Taking into consideration multiple time frames enables us to select sectors that are not only performing well at the moment but have shown consistency and potential over a longer time frame.

The timeframes we want to select will be those that have shown up most frequently at the top or close to the top of the top performing sectors. A few of the top performing sectors can be selected if we want some variety. These sectors are where we will be investing out money.

Selecting the Right Stocks

One option is to purchase a set of stocks that represent the whole sector and the set may perform considerably well. However, we can perform much better by simply selecting the hot stocks in that sector. You should note that a sector moving up in the market does not mean that every single stock in it will perform spectacularly, though a couple with outperform and those are the ones we want to keep our eyes on.

One technique for locating single stocks is similar to that used in sector analysis. Inside each sector, we aim to locate the stocks that indicate the biggest price appreciation. We can look at various timeframes o ensure that the stock behaves well over a long duration. The stocks that have the best performance over a couple of timeframes are the stocks that we will purchase for our portfolio.  Take a look at the charts for top performers by setting up trend lines. The price trend must be indicated and profit targets depending on the chart patterns must show          high gains relative to the risk on the higher side.

It is necessary to take into consideration other attributes before deciding on a stock to purchase. Some of these extra attributes you must go through before making a purchase include:

  • ·         Liquidity – Purchasing stocks with small volume makes it more difficult to sell at a reasonable price if rapid liquidation is needed. Make sure you invest in stocks that trade over several hundred thousand shares on a daily basis unless you are an experienced trader.    
  • ·         Price – Several traders do not go for high-valued stocks and tend to be attracted toward the low-priced stock. A good tip is to trade in stocks that are above $5, or even more. This does not mean that good cheap stocks or bad expensive stocks do not exist. However, if the other factors revolving around the stock show it has great potential to bring in a high return, then there is no need to avoid going for it because it is highly priced or simply buying a stock primarily based on its low pricing.

Another important thing to take into consideration is that exchange-traded fund (ETF) trading has advanced considerably in the last few years. If you do not desire to possess several single stocks, it is possible for you to locate an ETF that will provide you with reasonably similar outcomes. It is not an issue to purchase particular ETFs, if that is what you are comfortable with, which can reasonably copy how single stocks may have been chosen.

Exiting and Rotating

This procedure cannot assure you that you will gain extraordinary returns. However, it can provide you with a good opportunity to make above-average returns. You will need to keep an eye on some positions to ensure that your stocks and sectors are still in a good place in te market. It is necessary for the investor to be wary of overtrading, which may end up in too many commissions, hence the use of several timeframes.

If your stocks and sectors start to drop in performance in the timeframes which you were monitoring, then it is time to rotate into the other sectors that are currently performing well. Your general examination of the market will assist you in determining the ideal time to exit positions. When key trade lines in the stocks owned or sectors monitored break, it is time to leave and search for new potential trade candidates.


Implementing this plan does need occasional turnovers of trades since the hot stocks in the selected sectors will alter over time. The aim is to be in the stocks that are at the top of the market.  The plan is simple, look for the hottest sectors in the market that have been performing well for some time and then locate the hottest stocks in that sector or sectors. When the performance of the sector and stocks starts to drop, transfer your assets into the new top performing sectors and stocks. Continue doing this and you have good odds to make above average returns on a regular basis.  

3 Mar 2017 4:38 PM | Anonymous

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