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  2. Sector trading in bullish and bearish markets
  3. The Appeal Behind Sector Rotation
  4. Sector Rotation and the Stock Market Cycle | Charts | Trading strategies, Online trading, Investing

Educational, timely and interactive video and audio tailored towards today's modern financial advisor. Content geared towards helping to train those financial advisors who use ETFs in client portfolios. Artificial Intelligence is an area of computer science that focuses the creation of intelligent machines that work and react like humans.

See our independently curated list of ETFs to play this theme here. Blockchain technology allows for a recorded incorruptible decentralized digital ledger of all kinds of transactions to be distributed on a network. ESG Investing is the consideration of environmental, social and governance factors alongside financial factors in the investment decision—making process.

Marijuana is often referred to as weed, MJ, herb, cannabis and other slang terms. Short-term traders and long-term investors alike have flocked to exchange-traded funds ETFs in large part because of the exposure they provide to different segments of the economy. Investors can now buy a single ETF providing diversified exposure to a specific area of the global economy, which means strategies that were once mostly reserved for professionals are now accessible to everyone.

One such strategy is sector rotation. Equities often move in patterns, with certain types of stocks performing better in certain economic conditions, and other types of stocks performing better in other conditions. There are three general rotation strategies investors can use to attempt to capitalize on these patterns. Not all securities move together at the same time, at least not with the same magnitude.

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Business or economic cycles, seasonal or calendar tendencies, as well geographic location can cause certain stocks to perform better than others. The best-performing stocks will change as the cycles progress. Sector rotation strategies attempt to determine which segments of the global economy are likely to be the strongest, investing in ETFs related to those specific markets.

ETFs provide easy access to markets that were previously harder to invest in, such as commodities or a diversified basket of stocks from one stock sector.

The allure is that, if successfully executed, the investor is always invested in the strongest sectors or ETFs and therefore should see higher returns than a basic, diversified buy-and-hold strategy. In order to realize a profit, however, the investor must sell the once-strong ETF when it begins to weaken, and purchase another ETF that is expected to perform best over the next several months or years. This is where the drawbacks lie. In real-time trading it is not as easy to pin-point times to buy and sell different sectors as the theory implies.

Sector trading in bullish and bearish markets

Also, since the investor must actively manage the portfolio, commissions will increase along with the time dedicated to market analysis. Nonetheless, this approach will likely take up less time than researching multiple individual stocks. The economy moves from full recession to early recovery, to full recovery and back into early recession. This process may take many years to complete, but during this cycle the stock market will also be moving up and down. Stocks generally lead the economy, and will therefore bottom out and head higher before the economy begins to pick up. Similarly, stocks will top out before the economy begins to slow down.

When the energy sector XLE A is the top performer, it is often a sign the stock market is topping out. As the market gets weaker, utilities XLU A generally outperform. Finally, money begins to flow into financials XLF A ; when this occurs it is usually a sign that the broader market is close to a bottom.


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This pattern provides a general outline of which sectors will perform best and in what order. The strategy is to invest in the strongest sector ETFs, then when momentum begins to wane, exit the position and move into the sector that is showing the most potential. The order may change during any given cycle, so focus on actual sector performance and not just this historical tendency. During a bear market, it is important to remember that all the sectors may decline. Even if one sector is performing better than others, be aware that the sector ETF may still fall, resulting in losses.

The Appeal Behind Sector Rotation

During the summer months more travel and driving occurs, which may lift prices at the pump and increase margins for refiners. Demand increases may help those in the exploration and production side of the business.

Exit the sector when momentum begins to wane and the season winds down. By that time, there are other sectors to look at.

Connection with other markets

As September approaches, retailers generally see a jump in sales due to students returning to school. As shopping ramps up during the Christmas season, this sector also sees buying interest, but to what magnitude is determined by the overall consensus of whether it will be a busy or quiet shopping season.

Sector Rotation and the Stock Market Cycle | Charts | Trading strategies, Online trading, Investing

Overall market conditions may overshadow such tendencies. Therefore, wait for the sectors to show strength in anticipation of these points on the calendar before buying, instead of simply assuming the sector will perform well. Because of the constant state of flux in the market, this chapter attempts to review this strategy.

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Tools Request permission Export citation Add to favorites Track citation. Share Give access Share full text access. Share full text access. Please review our Terms and Conditions of Use and check box below to share full-text version of article. Summary One can employ both technical and fundamental indicators to identify when specific sectors or stocks are a strong, b weak, or c neutral. Sector Trading Strategies. Related Information. Close Figure Viewer. Browse All Figures Return to Figure.