Comparing 4 Stock Market Sectors & Their Volatility

One of my newest trading challenge students who wishes to remain anonymous but whose initials are N.P. has written some VERY basic but academic-sound guest posts for me…I’ll keep publishing them because I know many of you guys love this stuff and it’s a good reminder of how little most people know about the stock market.

Definitely read below and also watch my 7 free video lessons on stock trading basics

Certain industries, or sectors if you prefer to call it that, tend to be more volatile than others. It is not surprising, since each has a different market and operations. It is also possible to find very low volatile stocks in volatile industries. Technology is considered to be prone to volatility, but IBM is not. Utilities as a whole are not volatile. Certain industries are volatile due to being cyclical, and others are volatile due to being prone to frequent issues. It could also be any mix of these.

All kinds of energy stocks are subject to volatility. The industry covers oil, gas, and even renewable energy. Utilities are more about transport and distribution. Energy industries are about production and extraction. Certain parts of the energy industry can be more volatile than others. For example, green energy is prone to severe volatility. This can stem from its reliance on government funding, or technical failures.

Oil is prone to both environmental and political strife. A dust-up in the Middle East can cause the price of oil to jump. Hurricanes that shut down Gulf oil production can have the same effect. The increase in cheaper crude coming from Canada is allowing some refiners to increase margins drastically. Large contract victories can send renewable energy companies rocketing. The announcement of a large solar project helps the company that wins, and might help other solar companies rise in price too.

Telecoms used to be some of the safest investments out there, and there are a handful that can still be very stable. Overall the landscape of the industry has changed so much that it is prone to big shifts now. The move to LTE is fueling a lot of Telecoms and associated companies. You can include in this field companies that make equipment, even though they would be more characterized as technology companies. You will not see them classified that way if you look at S&P breakdowns, but for your own searches equipment makers can trade with Telecoms. That is only true for events that will impact spending by companies, such as shrinking revenues across the board. It will come down to interpretation of events, since some revenue contraction can lead to more CapEx as companies seek to upgrade their networks.

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Telecoms incorporate the mobile and wireless businesses. People will cell phones can be fickle if there is a fancy new device or plan from a different carrier. Also, customers are resistant to paying more for less service. Telecoms incur heavy debt in order to make the equipment updates. Look at TEF for a company that could be crushed by debt. If global interest rates go up, then it will be expensive to roll over debt. The alternative is paying it off, which would be a huge drain on liquidity. Telecoms were known for their great dividends, but that could end if debt becomes a greater problem. Not all telecoms are burdened by debt, since the risk of debt is better appreciated now.

Financials may be coming out of a slump. However, there are still some lingering issues from the financial crisis. Companies like Bank of America are still dealing with lawsuits. There is no consensus on how interest rate hikes will affect financial companies.
Also, activity that used to drive profits like mergers and acquisitions or IPOs are not consistent. M&A activity increases and decreases sometimes on a whim. One acquisition in an industry can set up a whole slew of deals. On the other hand, some high profile failures can cause more contemplation instead of action. IPOs have been less lucrative and plentiful as of late, though fees are not necessarily down there are less transactions occurring. Seasoned and mature companies go public, which means fewer companies make it out of the starting blocks and pay their toll to the gatekeepers of the stock market. When Facebook went public it was a large, fully-fledged company. The dotcom IPOs of the past seem to have died back there.

Resource extraction is subject to a lot of the same issues as those involved in energy. Oil is resource extraction as well. Materials refers to metals and other resources. Rarely are materials heavily concentrated. Iron, copper, and aluminum are found all over the planet. Uranium is found in a few stable jurisdictions like Australia and the US. Rare earths, which are not all that rare, might be the one exception with a great many exploitable deposits centered in China. China is stable, but is at times politically contentious with some other nations.

Materials stocks are extremely cyclical. Almost, all stocks are including the ones in energy, but even more so metals tend to rise and fall. The reason is probably that demand rises from so many industries that problems from any of them can lead to issues for resource producers. During good times there tends to be an increase in output, which can depress prices once demand growth cools down. Metals are not the only thing included here. Wood would be considered under materials, as would fertilizers such as potash. The diffuse geographic nature of the industry compared to some others protects it from natural disasters, but certain big ones can have an impact. The tsunami and nuclear crisis in Japan depressed palladium prices, as an example.

Looking for volatility stocks can be done without delving into sectors through the use of some metrics. Looking at industries is really for a more qualitative approach to find out what factors in the macroeconomic environment tend to impact certain stocks as a whole. Looking for news related to whole industries can be easier to parse during those lulls between earnings when you are looking for a potential momentum or other kind of play.