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Step #2: Measure the sector's performance.

This is where exchange-traded funds (ETFs) really help in the analysis process.

You can use ETFs as sector trackers that will give you a "pulse" on just how each sector is doing versus another. You simply find a well-diversified ETF that represents a sector; and then you do this for all the major sectors. Then you simply compare their percentage gain performance over a standard period of time.

But let's say that you've now found a sector that you want to buy, but the sector has 20 ETFs covering it.

That brings us to Step #3...

NEXT: Determine the timeframe.