The financial market has tens of sectors, including energy, consumer staples and discretionary, technology, financial, and utilities, among others. These sectors are not viewed in a similar way.
For example, energy stocks like ExxonMobil, Chevron, and Occidental have a price-to-earnings (PE) ratio of less than 10.
On the other hand, fast-growing technology companies like Tesla, Nio, and Palantir Technologies have PEs of more than 50. That’s because financial participants expect these firms to have excellent growth in the future. For example, with Tesla, they believe that the firm will dominate the automotive industry in the next few years.
So, let us look at some of the best sectors to trade in the financial market.
Table of Contents
Hottest sectors to trade
Electric Vehicles
In recent years, the success of Tesla has surprised the market. The firm’s shares rose by more than 600% in 2020 and is now valued at more than $600 billion. That makes it more valuable than all automakers in the world. It is also bigger than firms like Volkswagen, BMW, Toyota, and Nissan, combined.
Similarly, a smaller Chinese company known as Nio that sells a few thousands of cars every year, is worth more than $12 billion, making it a valuable competitor of Ford and Nissan. Its stock rose by more than 1,600% in 2020 and then begin to decline in early 2022.
Workhorse, another relatively unknown company that manufactures cars for the transportation industry, rose by more than 500% in 2020 even though its sales are relatively small. Other companies that have become extremely valuable are QuantumScape and Beem Global, among others.
The reason for this performance is that there’s an overall transition to clean energy. Countries like China and Germany have announced that they will gradually phase out fuel companies in the next few years. As such, they believe that these firms will dominate the automotive market, which generates billions of dollars every year.
Cloud Computing Industry
Another top industry that’s getting more popular in the financial market is cloud computing. Companies in the sector have performed extremely well because of their recurring revenue model and the overall transition to the cloud computing industry.
For example, Microsoft is now the second most valuable company in the world, not because of its software, but because of its cloud computing segment. Similarly, Amazon makes billions of dollars from its AWS business.
In 2020, cloud computing firms continued to deliver. For example, a company like Zoom Technology share price rose by 467% while Crowdstrike rose by more than 360%. Other top cloud computing firms were Asana, Okta, and Roku.
Notably, a cloud computing company like Snowflake, which launched its IPO in 2020 is now worth more than $52 billion. That’s even after it generated just $267 million in revenue in 2019. It lost more than $367 million during that period.
So, will the cloud computing technology sector continue to do well in the future? Possibly. This is mostly because of the demand for the products and the overall low-interest rates in the market.
Semiconductor sector
Another hot industry in the market is the semiconductor sector. For starters, this sector is the brain of all technologies used today. For example, the electric industry uses these products in their autonomous vehicles. Similarly, the cloud computing industry uses semiconductors in their data centers. The general computing industry uses these products as their brains.
Advanced Micro Devices (AMD) and Nvidia are two of the fastest-growing companies in the industry. The two have a price-to-earnings ratio of more than 50 while Intel has a PE of less than 20.
In 2020, AMD and Nvidia’s shares rose by more than 100% and 117%, respectively.
In addition to the size of the CPU and GPU industries, market participants love Nvidia and AMD because of their growing market share. For example, in 2020, the two announced that they were acquiring Arm Holdings and Xilinx, respectively.
Artificial Intelligence (AI)
The other hot sector in the financial market is artificial intelligence. While AI has been around for years, it gained its popularity in 2023 after the success of ChatGPT. Microsoft invested $10 billion in OpenAI, the company’s parent company. Amazon, on the other hand, invested $4 billion in Anthropic.
As a result, many companies with exposure in the industry jumped. Some of the top AI stocks were Nvidia, C3.ai, and AMD.
Nvidia is seen as an AI stock because the company builds the most advanced GPUs for the industry. Nvidia’s market cap surged to over $1 trillion in 2023.
How to find hot sectors to day trade
A common question is on how to find the hottest sectors to trade. The best approach is to read and watch market news.
Some of the most popular websites and platforms to know about are CNBC, Bloomberg, Wall Street Journal (WSJ), and Financial Times. These channels are known for hyping key events in the market. You can also use Trader.tv, one of the most popular YouTube channels for day traders.
In addition, social media is a great place to get this information. The most popular social media platforms are X (formerly known as Twitter), StockTwits, and Reddit. These platforms have grown popular in the past few months as traders use the technology to share ideas.
The other approach is to use market screeners to find the best stocks to trade. There are many free screeners that you can use like WeBull, Yahoo Finance, and MarketWatch. These screeners can help you to find the hottest sectors.
From sector to stocks
The other approach is to move from picking the sector to a stock. There are 12 primary sectors in the financial market like financials, technology, utilities, consumer discretionary, consumer staples, healthcare, and retail among others. After doing this, you should narrow the list to find individual stocks.
How to trade hot sectors
So, with this in mind, how do you trade the hottest sectors in the financial market?
First, you need to identify some of the fastest-growing sectors in the market. You can do this by looking at the overall PE ratio of companies in the stock market. A higher PE sends a signal that investors are willing to pay more for a company.
Second, you need to identify some of the hottest stocks in the market. You can do this by looking at some of the most volatile firms in the market using a market screener like the one found in Investing.com, Barchart.com, and Yahoo Finance.
Third, you should aim to take advantage of the news of the day. For example, you should aim to identify premarket gainers and laggards and the news behind the moves. Some of the best free sources for this information are Investing and Market Chameleon, among others.
Next, you should also focus on level 2 data and time and sales information. Level 2 shows you the bids and ask information in the market. The time and sales information shows you the volume of traders. This information will help you know whether there are more sellers than buyers in the market. You can look at our comprehensive guides on Level 2 and time and sales.
Further, at times, it makes sense to be contrarian when investing in hot sectors. The reality is that investors tend to overreact when looking at sectors.
We have seen this in some of the most popular sectors in the market. For example, clean energy stocks jumped during the ESG hype and then retreated sharply as the hype died.
Additionally, ensure that you are using multi-timeframe analysis to find the best prices to buy or short stocks and other assets. This is a process where you conduct your analysis across numerous timeframes.
Finally, you should let technical analysis be your guide when trading hot stocks in the market. This refers to the use of tools like MACD, moving averages, and the Relative Strength Index (RSI).
Also, you should use tools like Andrew’s Pitchfork and the Fibonacci retracement to identify potential levels.
Final thoughts
In this report, we have looked at one of the hottest sectors in the market, why they are hot, and some of the best names in the industry, including Tesla and Nio. We have also looked at the best strategies to trade the three sectors we have identified.
External Useful Resources
- Find the Hottest Stocks in Any Sector – Scanz
