Definition of Sector Analysis Research
Sector Analysis Research relates the performance of common stocks and industry groups to the economy. The primary technique employed is a well-documented class of factor analytic methods known as Principal Components Analysis (PCA). Through PCA a set of domestic and international economic time series has been clustered into a set of 20 Factors. Each factor measures an important aspect of the economy such as long term interest rates or cost-of-energy.
Each factor was first analyzed to determine its "normal" range under a variety of macro-economic conditions spanning a decade. A factor does not enter the analysis, e.g., does not influence the results, until it moves outside its own "normal" range. The effect of this is to remove economic "noise" and increase the stability of Sector Analysis techniques. The likelihood of detecting true signals is greatly increased. The result is a set of factors which truly influences the behavior of common stocks.Equations based on empirical relationships for each individual stock are created. By noting those factors outside their "normal" range that have a leading relationship with specific stocks a measure of the stock's attractiveness is developed.
This measure is called Economic Preference. Preference ranks equities based on their relative attractiveness in the current economic environment.
A comparison of these rankings with other information developed by the money manager provides a powerful tool in selection of specific equities for inclusion in the portfolio or the elimination of existing holdings.
