Some like it hot! And by ‘some’ we mean traders, and by ‘hot’ we mean sectors. Not sure what a hot sector is, exactly?
This is the episode for you. In our continuing series on essential day trading variables, Stephen Johnson schools newbie trader and co-host Kim Ann Curtin on vital things to know before making ANY trade.
This review of fundamentals is awesome new traders, but even established traders can get a refresher on the essentials.
What’s a Hot Sector?
Just as fashion trends like skinny jeans or cargo pants come and go, the stock market has its own areas of popularity. That could be a single stock or an entire sector.
Kim came to the meeting with notes. As she sees it, “sectors” in the stock market can be narrowed down to the following:
- Basic Materials
- Consumer Discretionary
- Consumer Staples
- Health Care
- Information Technology
- Real Estate
But according to Stephen, that’s not quite how it works in low-priced stocks … Sectors are often less established. It’s more about what captures the public eye.
They’ll also be more specific. For instance, at the time of this airing, the hottest stocks are all related to the coronavirus. But within recent memory, we’ve had plenty of hot sectors: green energy, biotechs, marijuana stocks … the list goes on.
These are sectors that get VERY hot for a relatively short time and experience a ton of volatility. From a trader’s perspective, this creates opportunities to ride the trend as these stocks experience rapid growth.
Oh, and in case you’re wondering: yes, there are still hot sectors during a market crash! Coronavirus stocks and related plays are perfect examples. Even while the market’s down, some stocks are going sky-high.
What Makes a Sector Hot?
It all starts with some people believing in a stock … Then they buy it. Other people see that, and they buy in, too. Other people might see the stock and realize it’s not a good company. But they see that OTHER people are buying … so they buy too.
After a while, it becomes a domino effect. It’s a huge game of buying, even if the stock is rubbish. And it’s all because traders think it could run because it’s a sector with volume.
According to Stephen, it’s a kind of mass-crowd hysteria: it makes people “so irrational it’s unbelievable.”
How Long Does a Sector Stay Hot?
If a sector’s hot, that implies that it was once at least warm or possibly cold. And it could get that way again. A hot sector won’t last forever, so how long WILL it last?
Short answer? You can’t ever totally know.
In the episode, Stephen schools Kim on what informs a sector’s hotness. That includes the news, world events, a compelling story … and how its heat plays out in the market.
The Age-Old Hot Sector Story
Hot sectors are often as predictable as rom-coms. First, there’s a sector leader. This is a pioneering company that generally leads the way. It might be in an exciting new industry, or it might be a company with totally sexy news.
This is the one that has the strongest chance of doing well. So you look for sympathy plays or other potential stocks that will follow this trajectory.
When the leader runs other stocks will run too. But if the leader fails they’ll all fail too. Stephen offers some key tips on how to handle this scenario and how to find the best trading opportunities!
Can You Predict a Hot Sector?
Kim wants to know if she should try to predict the next hot sector…
Sadly, for Stephen, that’s a hard no. He explains why trying to predict a hot sector is often a waste of time. But there is a much smarter approach…
Tune in for his helpful tips on how to recognize a hot sector and approach potential trades.
Love these episodes about variables? The topic of SEC filings is coming up soon … and co-host Tim Bohen will be in on the action!
Curious About Something?
Got a question about these variables … Or something else about trading? Hit us up!
Remember: if your question is chosen as an on-air topic, you could win a SteadyTrade mystery gift box. Leave a comment below or on YouTube!
Thanks for tuning in to the SteadyTrade podcast. Stay tuned for weekly episodes featuring the hottest topics for aspiring traders.
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