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 of money.
The market works the same way– money leaves a trail.
If you don't understand why... you need a coach -
Make money while you learn.
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.
see below for more detail
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
shows these relationships and the order
in which the various sectors should get
a boost from the economy".
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
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
an inverted yield curve and its effects on the stock
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
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. 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
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!
DON'T WORRY ABOUT
UNDERSTANDING EVERYTHING SHOWN BELOW... IT'S MORE DETAIL THAN
YOU NEED RIGHT NOW.
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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? 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.
Recommend this site to a friend.