Industry Group Analysis

An industry group consists of companies in closely related businesses. Stocks within a group tend to move together because companies in the same industry are affected in similar ways by market and economic conditions. Institutional Investors track industry sector and group performance closely to determine which sectors and groups are coming into favor and which ones are cooling down. At the beginning, a group rotates into favor as one institution after another starts accumulating shares in the best companies in the group. As more money flows into the group, the best companies become fully valued and money moves into secondary stocks in the group. Eventually the group becomes overpriced, or economic conditions for the group turn unfavorable, and money rotates into the next hot group.

To analyze the trend of industry group rotation, the most direct and efficient way is to use a composite index calculated from the components within the group. In today’s fast changing world, new companies show up and old companies phase out in the equity market constantly. Many other activities may affect the group index calculation as well, such as merging, stock buying back, spinoff, etc. If a composite index is not able to adjust its allocation frequently enough to keep up with changes, it will become disconnected and cannot accurately reflect the performance of the underlying group. In considering this, Timing Laboratories has come up with the DAI (Dynamic Allocation Index) to track the industry group performance. DAI is a composite index with the allocation of components repositioned dynamically on a daily basis. It can be used on any group of equities that have the daily OHLCV (Open, High, Low, Close, and Volume) information.

Since early 2004, Timing Laboratories started to use DAI to calculate indices of different groups using various industry categorizations with historical data dated back to January 1, 1980. The industry group analysis published on this web site uses a market cap weighted DAI based on the 215 industry groups categorized by the YAHOO! Finance. The components of the indices are selected from a total of over two thousand stocks listed for trading on the New York Stock Exchange, the American Stock Exchange or quoted on the NASDAQ National Market. With no preferences or affiliations with any or the companies or categorizations, our studies show that this combination has produced the most comprehensive, reliable and consistent results.