Sector rotation in
the economy and ETFs
in the stock market.

     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 stock market... here.

     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.stockcharts.com and 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.  Go to Useful Links for more sites about sector rotation.  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 looking forward 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 chart, the 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 months. Get charts on these indicators here from BullandBearWise.com <<Great site Sector Rotation Model:     "This theoretical model is based on Sam Stovall's "S&P's Guide to Sector Rotation" and states that different sectors are stronger at different points in the economic cycle. The graph in the model shows these relationships and the order in which the various sectors should get a boost from the economy".    Sector/Industry Symbols for charts You will need this to get sector symbols for your chart if you don't know it. 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. Consumer Expectations:    Industrial Production:         Interest Rates:                  Yield Curve:                      Full Recession       Reviving Bottoming Out Falling Normal Early Recovery       Rising Rising Bottoming Out Normal (Steep) Full Recovery           Declining Flat Rising Rapidly (Fed) Flattening Out Early Recession          Falling Sharply Falling Peaking Flat/Inverted      Study the 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?  As of Feb. 2006, haven't we been hearing a lot about the flattening and almost inverted yield curve?  Yes, and that signals an anticipated slowdown in the economy which is negative for the markets going forward.  So the market starts discounting the future value of housing stocks.  They start declining NOW, they don't wait for the actual slowdown to hit the economy.  The stock market LEADS THE WAY, it anticipates...the economy does its thing and the cyclical pattern is in place.  The Market Cycle precedes the Economic Cycle because investors try to anticipate economic effects. You've seen housing stocks drops since Jan. 2006, you could have capitalized on that by shorting housing stocks or buying put options as a good example.

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