Many futures index traders make most of their trades based on technical analysis. If the trader is not reacting to price action, he or she is anticipating price action based on technical patterns.
What technical traders may be missing is a proper understanding of the fundamental aspects of the markets. Now, you don’t need a sophisticated knowledge of market fundamentals to be able to trade, but it certainly can help to follow the fundamental conditions when attempting to forecast the near-term market environment.
Fortunately, there is a “technical” way (as ironic as that may sound) to help evaluate the fundamentals by following 5 specific sectors: Retail, Regional Banking, Transportation, Biotechnology & Semiconductors – a strategy originated by market expert Michele Schneider.
It is helpful to monitor these sectors on a separate screen, as they are security index ETFs.
To monitor the “broader market,” it helps to observe a large-scale index and a smaller representation of it’s various segments. Hence, we recommend following the Russell 2000 as the “big picture” index, and five sectors that can provide useful key data on market fundamentals and investor sentiment. Let’s start with the big index, the Russell 2000.
The Big View – The Russell 2000
Although large American companies often get the spotlight, one can arguably say that the US economy is built on American small businesses. This includes everything from your ma and pa town grocer to small companies that dominate a particular industry. Of course, most US businesses are privately owned, so your second best proxy may be the Russel 2000, comprised of 2,000 small US businesses.
By following the Russell 2000, you have a finger on the pulse of the US economy. Plus you’re would be observing an index that is much larger than the Dow, S&P 500, and the Nasdaq Composite.
Sector 1 – Retail
The spending of American consumers makes up an important aspect of the US economy. If people have extra cash, they’re likely to spend more. If they’re strapped for cash, then spending tends to drop. In short, the retail sector is a good measure of consumer sentiment. (Proxy for this sector: XRT)
Sector 2 – Regional Banking
What’s so important about regional banks? It’s where local people stash their money. It’s also where many individuals and small businesses get their loans. Regional banks are sensitive to Federal Reserve interest rate moves. Plus, it might help give you a sense of how Americans are saving and borrowing. (Proxy for this sector: KRE)
Sector 3 – Transportation
Regardless of whether consumer shopping happens in store or online, goods still have to move from one place to another. Just as Charles Dow in the late 19th century realized the importance of observing transportation during the Industrial Revolution, transportation still plays an important role in observing the movement of goods across the country. If this sector is doing well, business is booming. If it starts to dwindle, then that’s telling you something important. (Proxy for this sector: IYT)
Sector 4 – Biotechnology
Why biotechnology? Well, it’s the cutting edge of the pharmaceutical industry. It’s highly speculative. And if money is pouring into a highly speculative industry like biotech, then investors might be feeling rather optimistic about the economy. This optimism tends to flow into other sectors as well, meaning investor funds just might follow. (Proxy for this sector: IBB)
Sector 5 – Semiconductors
The semiconductor industry essentially develops the brain and future direction of all computer tech, and this includes new developments like artificial intelligence, big data, cloud tech, and automation. As new technologies unfold and get adopted, it tends to create new jobs and disrupt old ones. Paying attention to the semiconductor industry gives a glimpse into the potential direction of business in the future. And that will invariably affect global markets and economies. (Proxy for this sector: SMH)
The Bottom Line
Indexes are ultimately shaped by fundamental factors. If you are a technical trader, even a basic understanding of fundamentals can help you follow the movements of supply and demand. Following these five sectors/industries can help give you a heads-up as to the general direction of the economy, potentially making your market outlook more well-informed and sound.
Please be aware that the content of this blog is based upon the opinions and research of GFF Brokers and its staff and should not be treated as trade recommendations. There is a substantial risk of loss in trading futures, options and forex. Past performance is not necessarily indicative of future results.