If you plan on trading the popular
ETFs (Exchange Traded Funds) you had better understand sector
rotation and all that if implies. This applies to everything in
the market, not only ETFs.
If you found $10 on the ground
and a few steps later found a $20, and later still a $50 and
so on- you'd could say you're on to something– a trail
The market works the same way–
money leaves a trail. If you don't understand why... you
need a coach.
Don't get lost in the minutia of economics shown
on this page and links. I want you to understand WHY money
moves around. Know the relationships of one event to an industry
or sector and how it can be to your advantage to anticipate where that
money will flow to or out of if "X" or "Y" happens. We improve our odds
and that's what it's all about.
for more detail
It is hard to hide billions and billions
of dollars flowing into or out of a sector of the economy. It
leaves a trail like an elephant walking through cheesecake...
welcome to Sector Rotation. Need proof? This late 2006, look
at the money (charts) going into the gold sector in the last
year or coming out of housing in the last 18 months or going
into oil in the last two years.
Sector/Industry Symbols for charts
Although what you will learn is generally for
swing or position trading, if you insist
on day trading be warned:
Risk in Day Trading
Sector rotation (money moving from one sector or industry to an
other) occurs every day in the marketplace. The result of
economic relationships forces money managers/traders to move their
funds before stock prices in some sector drops sharply. The
sectors I am looking for are the sectors that are making or have
been making the market behave a certain way, trending up or down for
the past few days or weeks or even months. The rotation comes
from money, lots of money from mutual funds, hedge funds, etc.,
leaving one sector, such as the drug sector or oil sector or
transportation sector and starts going into sectors that benefit
from those same factors which are negatively affecting the sector
being drained. Sector rotation plays tend to be of longer
durations because money rotates according to basic economic
circumstance that requires time to set up, trend w/inflow, then
reverse, and trend w/outflow of volume. For example, oil
prices go up, transportation stocks go down but oil stocks move up;
interest rates move up, housing and financial stocks go down and
consumer staple stocks go up; interest rates go down, retail stocks
go up...etc. It is all about cause and effect and
relationships. Sometimes that rotation is a one-day
wonder based on big news affecting a major company in a sector.
Everything in the sector jumps or falls but the reason there is no
follow through in that sector is due to the news being company
specific, not sector specific. So unless I am day trading I am
not really interested in that sector.
Watch a dynamic demo of interest rate fluctuations and
especially an inverted yield curve and its effects on the
You benefit from this rotation by being able to identify
which sectors are going up or down establishing a trend. A
trend up is higher highs and higher lows and a downtrend is lower
highs and lower lows. We are not interested so much in the
day-to-day rotation as we are in trending rotation, i.e. those
sectors leading the market up/down over a verifiable trend and time.
In short, a trend that has substance or legs to it.
Though this daily sector rotation might appeal to day
traders, the sector rotation I'm speaking of is more basic than that
and tends to be of much longer duration because it is tied to
changes in the economy which happen over time not overnight. I
am looking for those sectors that have been pushing the market in
one direction or another in recent weeks, if not months.
I review the rotation behavior weekly during my
routines. Probably the most comprehensive of sector
rotation sites are
www.barchart.com. I will show you how to use these during
our sessions. For ALL the sector/industry symbols known to man
visit stockcharts.com on this specific page, click
here. These are great sites to
spend time on the weekend seeking trades in the right sectors for
the coming week.
If big institutional money
moves the markets, shouldn't you be following that money?
Institutional money managers are not day traders. They are
following the sector strengths and weaknesses
to a perceived environment
for many months in the future because of basic changes in the
economy and thus trends develop.
You and I know that, even if they are correct, prices rise and
fall in a longer term trend. Of course we traders want to
take advantage of that.
Is it even possible to be
short the sector that is being drained while I'm long the
sector that rising? Yes. The ultimate that I am trying
to do is identify and participate in those sectors that are
pushing the broad markets. You only have to look at the
metals sector, the oil sector and gold sector in recent months
(2006) to see how strong they have been. Could you enhance
your trading by working in these sectors, the sectors that in fact
are gaining or losing so much big, big money that their momentum
has a life of its own? I believe you can and should.
I use to say try to stay on
top of the rotation, now I say,
you must see the big picture. Ultimately, you will have
a stock, a sector and a market all going in the same direction.
Pull up all three charts, the S&P500
sector chart you're interested in and the stock chart
at the same time. Do they support each other? If so,
you have just enhanced your probabilities...isn't that what we're
trying to do, to put the odds in our favor? You bet it is!
Rotation occurs through many
time periods. As swing traders we are concerned
with the trends this week or the past few weeks. The
government announces 27 indicators about the health
of the economy every month. They move markets-
they can and do induce
rotation, sometimes for a short time, sometimes for many
Get charts on these indicators here from
BullandBearWise.com <<Great site
Explanation of chart above.
Economic Stages start at the bottom or a Full
Recession and move into Early Recovery
to Full Recovery to Early Recession...
very cyclical, very predictable and thus making
market behavior somewhat predictable.
Rising Rapidly (Fed)
Yield Curve and you can see the relationship between
rising and falling rates to the stock market. You need
to be aware of where we are in these cycles...if you simply
read the daily/weekly market recaps you'll find out.
Where are we now?
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