Sector Rotation Strategy

Sector rotation strategies have been shown to outperform buy and hold investing. Creating your own sector rotation strategy is quite easy with the right tools. Many people only use an ETF sector rotation strategy, but I focus more on stocks as the profit potential is greater than ETFs.

Sector rotation has its roots in the economic cycle; where certain sectors outperform others depending on the stage of the economic cycle. However, this doesn’t always work out, and we are not going to guess which sectors should be outperforming at any given time. Instead, we are going to let the market show us.


Sector Rotation Strategy Chart
Sector Rotation Chart.       Source

Above is a chart showing the performance of 11 sectors against the S&P 500. The symbols and sector names can be seen in the following screenshots below.

Sector Rotation Strategy

A simple sector rotation strategy is checking for the three best performing sectors over a 3-month period, and buying their equivalent sector ETFs. Then every month check their performance. If one of them drops out of the top three, sell that ETF and replace it with the new top 3 entrant. The performance return can be further improved by only selecting sectors that are outperforming the S&P 500. 

With the right tools, this can also be done with stocks instead of just ETFs.

Sector and Industry performance

One of the best tools for stock market sector analysis is TC2000. They have a ‘Sector by Year’ layout which I have slightly modified. I have only changed the various year columns, to suit my needs. Below is a screenshot of the sector layout with my column modifications.

Click on the screenshots for a larger view.

Sector Rotation strategy performance
Sector Performance.       Source

I have modified the columns so that the sectors/industries/stocks can be sorted for percentage performance for 1 day, 1 week, 1month, 3 month, 6month, 1 year, or year to date. Choose what is appropriate for your trading or investing style.

In the example above, the 1-month percentage change has been selected. The best performing sector for the month was energy with over a 10% gain for the month. By selecting the sector, the industry groups within the sector will be shown, along with the stocks within the sector. If we select an industry, only the stocks within that industry will be shown.

As shown below, we have selected the top performing industry within the energy sector; ‘oil and drilling’.

Sector Rotation Strategy Stock chart
Sector Rotation Stock Selection.       Source

The screenshot shows the stocks for the industry group ‘oil and drilling’, sorted by 1-month percentage change.

By going through the top three performing sectors and their industry groups, the best performing stocks can quickly be found. Why settle for just ETFs when with the right tool, the best stocks can be found which could give better returns. I trade both, ETFs and the best stocks.

Having TC2000 and only trading ETFs is like having a Ferrari and only driving it in second gear.

But I can respect the safety argument for ETF use, and everyone has his or her own risk profile. As long as that is the reason, and not the extra workload of finding stocks. Because with the latest version of TC2000 you can now quickly scan the sectors, industries, or the stocks within a sector or industry.

The screenshot below shows the stocks in the ‘oil & gas E&P’ Industry. There are 140 stocks.

Sector Rotation Strategy Stock Screener
Sector Stock Screening.       Source

There is no need to manually go through all the stocks, as they can now quickly be scanned. With a few clicks, you can scan the stocks with various conditions, formulas, indicators, fundamentals etc.

With sector rotation, the workload is greatly reduced by only focusing on the top sectors and ignoring those under-performing the S&P 500. Add to this the ability to scan only the stocks in the remaining sectors, and the workload is greatly reduced. In fact, I feel embarrassed calling it work.

With the sector layout shown above, the work can be done over the weekend. However, TC2000 also has another great layout called DrillDown, where the best performing sectors, industries and stocks can be found on a daily basis.

I have to admit, outside of their stock screener, this is my favourite way of finding stocks that my scans may have missed.

Sector Rotation strategy Analysis
Sector DrillDown Layout.       Source

With the DrillDown layout, it is easy to stay focused on the top sectors, industries, and stocks for the day.

In the screenshot above, you may have noticed the column ‘Vol Buzz’. This is TC2000’s own proprietary volume indicator. It shows stocks which are having unusually high volume activity compared to their normal volume.

Tip: By focusing daily on the best performing sectors and industries, which have stocks with a high ‘Vol Buzz’, you will find some great gems.

If you believe in the concept of sector rotation as a means to outperforming the market, and are looking for the best tool to implement your own sector rotation strategy, you may have found it.
Give TC2000 a try.