Sector rotation is a dynamic way to invest that can boost your portfolio. By moving your investments between different sectors of the economy, you can play the market and the cycles. This is more than just buy and hold, you can adjust your strategy as the market evolves.
Many investors use ETFs for sector rotation but individual stocks can give you more opportunity for profit. With the right tools and analysis you can create your own sector rotation strategy that fits your goals and risk tolerance. By picking the right stocks in the right sectors you can get better returns than the broader market or sector ETFs.
Sector Rotation Strategies
Sector rotation has two approaches for investors: ETF-based and stock-based rotation.
ETF rotation is popular for time constrained investors because it’s easy. But stock-based rotation can give you more returns if you’re willing to put in more work.
To do stock rotation effectively you’ll need a good stock screener. This tool helps you find companies in sectors that are growing. It takes more research but stock rotation can be rewarding.
Consider your time and investment goals when choosing between these approaches. ETFs give you broad sector exposure, individual stocks give you targeted opportunities. Both strategies play the cycles by moving your investments across different industries.
What causes Market Sector Shifts?
Sector rotation is a dynamic way to invest that plays the cycles. As the economy goes through different phases certain industries will outperform others. This is about shifting your investments between sectors to follow the economic changes.
Instead of predictions, smart investors let the market trends guide them. By seeing which sectors are trending you can adjust your portfolio. This data driven approach helps you get ahead of the market shifts.
To do sector rotation:
- Monitor sectors regularly
- See the trends
- Adjust based on market signals
Remember past performance is not a guarantee of future results. Historical patterns can give you clues but you must be flexible and responsive to current market conditions. By being informed and adjusting your strategy you can get more out of sector rotation.
Sector Rotation ETFs
- XLC: Communication Services
- XLY: Consumer Discretionary
- XLP: Consumer Staples
- XLE: Energy
- XLF: Financials
- XLV: Health Care
- XLI: Industrials
- XLB: Materials
- XLRE: Real Estate
- XLK: Technology
- XLU: Utilities
These ETFs track the 11 sectors defined by the Global Industry Classification Standard (GICS). Each gives you targeted exposure to companies in its sector.
When you do sector rotation you can use these ETFs to adjust your portfolio allocation based on market conditions and economic cycles. For example you can increase your exposure to defensive sectors like Consumer Staples (XLP) during economic downturns or shift to cyclical sectors like Technology (XLK) during economic growth.
Note that different platforms may use slightly different sector names or ETFs. Using the same set of ETFs across your tools will help you keep your rotation strategy clear.
Sector Stock Screener
Stock Rover has a great layout for sectors and industries. It’s easy to navigate and quick to sort top sectors across different timeframes.
The platform uses sector names aligned with GICS:
- Communication Services
- Consumer Discretionary (Consumer Cyclical)
- Consumer Staples (Consumer Defensive)
- Energy
- Financials
- Health Care
- Industrials
- Information Technology
- Materials
- Real Estate
- Utilities
Stock Rover has a pre-built watchlist called “Sector ETFs” that can be customized. For this example we will use SPDR Sector ETFs, widely used in financial media and tradable:
Sector ETFs with Tickers: Consumer Discretionary (XLY), Consumer Staples (XLP), Energy (XLE), Financials (XLF), Health Care (XLV), Industrials (XLI), Materials (XLB), Real Estate (XLRE), Technology (XLK) and Utilities (XLU).
Using these ETFs in your sector rotation will help you play the trends and align your investments with the economic cycles. Remember to monitor the market and economic events to get the most out of it.
Sector Performance
You can use a stock screener to evaluate and visualize the relative performance of 11 SPDR sector ETFs over the last month. This visual will help you see how the different sectors have performed against each other. By looking at the colored bars you can see which sectors have beaten or lagged recently. This can help you make informed decisions or adjust your portfolio.
Sector Rotation: A Simple Strategy for You
Sector rotation can get you more returns. This is shifting between sector ETFs based on their recent performance. Here’s a simple way to do it:
- Top performers: Look at sector ETFs performance over the last 1-3 months.
- Pick the best: Select the top 4 ETFs.
- Market conditions: Make sure the S&P 500 is above its 200-day moving average.
- Invest and monitor: Buy the selected ETFs and review monthly.
- Adjust: Replace the underperforming ETFs with new top performers.
- Stay alert: Sell all positions if the S&P 500 goes below its 200-day moving average.
You can modify this strategy by adding more ETFs or setting specific return thresholds. For example you can add a 5th ETF if its 1-month return is 4% or more or its 3-month return is 10% or more.
Remember while ETFs give you diversification, they may limit your potential gains compared to individual stocks. Your risk tolerance and investment goals will guide your decision between ETFs and stocks. A good stock screener can help you apply the same rotation principle to individual stocks if you’re comfortable with more risk and potential rewards.
Stock Rotation
Stock rotation requires analyzing sector performance over different time frames. By looking at returns over various time periods you can see which sectors and stocks to invest in.
Start by analyzing sector performance using ETFs or sector indices. Look at the following time frames:
- 5-day (1-week)
- 1-month
- 3-month
- 6-month
- Year-to-date (YTD)
- 1-year
Adjust based on your investment style:
When you see the same sectors appearing as top performers across multiple time frames it’s often a trend. This consistency will guide your investment decisions.
As a safety net make sure the S&P 500 is above its 200-day moving average before you implement your strategy. This simple check will help you avoid potential market downturns.
Once you have your top sectors, usually the top 10, you can then run stock screens within those sectors to find individual stocks that look good. Look for stocks that fit your investment criteria and risk tolerance.
Remember to:
- Review and update your sector rankings regularly
- Adjust your positions based on sector performance changes
- Stay diversified to manage risk
- Set clear entry and exit points for your positions
By combining sector rotation with stock analysis you can ride the big trends and select individual stocks with good fundamentals or technicals.
Remember this strategy requires active management and market knowledge. Stay up to date with economic news, industry trends and company specific news that may impact sector performance.
Lastly always align your stock rotation strategy with your overall investment goals and risk tolerance. While this can give you opportunities for outperformance it also comes with more complexity and higher transaction costs.
Beating the Market
Sector vs S&P 500
Focusing on sectors that beat the S&P 500 can give you higher returns. A simple way to do this is to select sectors that are up at least 2% over your time frame.
To do this:
- S&P 500 above 200-day moving average
- Top sectors using a data source you trust
- Sectors up 2% or more vs S&P 500
- Run your stock screens within those sectors
This will put you in position to beat the market. But make sure you align your exit strategy with your personal trading plan.
Benefits of this approach:
- Easy to implement
- Focused on current market trends
- Risk adjusted returns
Remember sector performance can change fast. You may need to review and adjust regularly to stay in position.
A chart can help you see sector performance at a glance.
Market Segments and Business Sectors
Looking at Charts by Hand
Drilling down into sectors can give you more insight for your investment strategy. While focusing on the 11 main sectors is often enough, looking at industries within those sectors can be even more precise.
Take the energy sector as an example. By breaking it down into its industries you can see which ones are performing best. Oil & Gas Exploration & Production might be up 10%+ for the month, beating the sector.
This level of detail allows you to select specific stocks within high performing industries. For example the Oil & Gas E&P industry might have 35 major US stocks to consider.
When looking at charts by hand you can simplify the process by focusing on top performing industries. In the technology sector for example you might skip industries with less than 2% monthly returns if you are following an outperformance strategy.
This will save you a lot of time on chart analysis. By focusing on the leading sectors and their top industries you can find promising stocks quickly.
Weekend chart review is a good habit but you don’t need to look at every stock individually. Your stock screener can do a lot of the work for you so you can focus on the best candidates.
Remember:
- Look at industries within top sectors
- Focus on industries beating their sector
- Sort by daily, weekly or monthly changes
- Use industry performance to narrow down your manual chart review
- Use your stock screener to complement manual analysis
By combining sector rotation with industry level analysis you can refine your stock selection process and find more winners.
Running Sector Stock Screeners
Sectors and Industries
Stock screeners can be used to quickly look at stocks within top sectors. You can import pre-built screeners or build your own custom ones to fit your strategy.
To import screeners:
- Go to the Library
- Click on ‘Screeners’
- Search for screener types
- Select the screeners you want
- Click import
When selecting sectors and industries focus on the ones that are showing positive momentum. For example you might target the top 4 sectors: energy, technology, real estate, consumer discretionary.
To filter by sector:
- Open your stock screener
- Find the sector selection
- Select the sectors you want to look at
- Apply the filter
You can further narrow down your search by selecting industries within those sectors. This will allow you to focus on the best parts of the market.
Tips for sector screening:
- Start with broad sectors
- Add industry filters if needed
- Use pre-built screeners for growth, value or momentum
- Combine sector filters with other criteria like financial ratios or technical indicators
By focusing on top sectors you get an edge in finding opportunities. Remember to review and adjust your sector selection as market conditions change.
Sector Rotation Benefits
Sector rotation can simplify your investing. By looking at top sectors you narrow down your stock selection. This will give you a higher chance of beating the market.
Stock screeners make it even easier. These tools will look at stocks within top sectors for you saving you time and effort. You can find opportunities without having to do a lot of manual research.
Sector rotation doesn’t have to be hard. With the right tools you can track sector performance and adjust your portfolio. This will allow you to be nimble and ride the trends.
Look into software for sector rotation. These will give you insights and help you execute your strategy. By using technology you can simplify your investing and make better decisions.
More Stock Screeners: