Today, we explore why picking the right sector is just as important as picking the right stock.

Although the market has been a little stagnant/choppy over the last few days, there are still some underlying dynamics that need to be understood. Specifically, although the market is going sideways, not all sectors are. In fact, we're seeing some clear divergences among the major sectors. Why would that matter? Because you don't want to be trading against the grain, so to speak. You're far better off knowing which sectors are falling in or out of favor, so you can follow that lead rather than fight it.

This methodology specifically uses performance (price change) rather than charts. Using charts alone can make it difficult to compare 'apples to apples', especially when you're trying to spot rotation. Instead, we're going to compare performance (percentage gains) over the last month relative to the one-month gains from one month ago. Confused? Don't be. Just think of it as a 'then and now' comparison. Take a look at how each sector performed (as of yesterday) for the last month, and compare that to how they performed for the prior month. After that, be sure to read below for our thoughts on the data.

Sector Performance Ranking (most recent month versus prior month)

Clearly the top performers were basic materials, energy, and then technology......in that order. All of them had huge Novembers, and performed much netter than they did the month before. However, there's a reason we highlighted them in red. Although they're 'on fire', they're also ripe for a correction. As for materials, they've gained 15% in about two months. A lot of that has to do with gold's recent performance, but some of it is attributable to a slight rebound in oil prices and commodities, as the market is fearful of a downtrend for other stocks (as well is continued inflation). The thing is, none of those things is the likely outcome. We're set for a brief market correction, but nothing major on the horizon, so gold could soon lose its luster. As for oil, we think the rise in prices is more the result of the first stretch of cold weather we've been through so far. That will subside. As for inflation, we don't see it getting any worse than it has been. As soon as the market realizes that, we'll look for all other stocks to benefit at the expense of basic materials.

The financials and discretionary stocks had a decent Novembers, but actually lost some of their pace from the previous month. That's not necessarily a bad sign, though. In fact, that fall from the leadership role they had last month may be creating a nice entry opportunity.....they're cheaper than they were (relatively) a month ago, but still in a nice uptrend. In fact, the financials and the discretionary are two of our favorite sectors for the coming year.

The utilities and industrials are highlighted in green because they saw improvements in the rate of gains in comparison to the previous month. Based on that initial data, they may look like prime bullish candidates, right? We'd normally agree, although in this case, we're a little skeptical of at least one of them. The utilities were the only stocks to lose ground in October. Although they turned it around the following month, they were still one of the worst performers for November (and they had the benefit of a strong selloff the month before!) Momentum-wise, they still have the least to offer. By the way, we're generally bearish-to-neutral on the longer-term prospects for utilities now.

As for the industrials, we like the fact that they've shown us consistency from one month to the next. And unlike tech and basic materials, they aren't overextended and ripe for a correction. We anticipate moderate strength from the industrial stocks over the next few weeks to months.

Price Headley is the founder and chief analyst of BigTrends.com.