What is sector rotation? And how can an investor identify this phenomenon to make profits in the stock market?
Simply put, it helps bull markets run longer. Why?
When one area of the stock market goes on a big climb, investors naturally become reluctant to buy at higher prices. They take profits and reinvest the capital in another promising field. The sun rises in the U.S. and Canada during the morning, then sets in the evening. But the sun then begins to shine in the Asia-Pacific region. Then it travels to Europe, Africa and South America. A good bull market acts in a similar way.
Sector rotation can get sparked by new economic conditions, new innovations or inventions, new developments in global politics, or new moves in other financial markets. So embrace the N in CAN SLIM, IBD's seven-point investing method.
Sector Rotation: 10 Tips
It takes effort and discipline to spot profitable opportunities that arise out of rotations. And you need the courage to buy those stocks that develop from those shifts. A large index such as the S&P 500 is not going to telegraph you signs of rotation.
Here are ways to spot sector rotation:
- Scan the IBD industry group rankings at IBD Data Tables at Investors.com. Compare the current ranking with the rankings three and six weeks ago to detect shifts. MarketSmith also displays rankings one week ago, as well as three and six months earlier. You can also rank the 197 Industry Groups list by year-to-date change. Look for big one-day percentage moves by laggard industry groups. It could be the start of a major rebound.
- Study the IBD stock research tables. They do not list stocks alphabetically; instead, stocks get ordered based on their sector's performance. Check the list regularly to spot key changes in the sector rankings.
- View the daily and weekly action of S&P and other sector exchange traded funds. The Financial Select Sector SPDR (XLF) fund made an enormous gain in the week ended Nov. 13, 2020, that sparked a terrific advance. It jumped 8.3% in the heaviest weekly turnover in five months.
- Scour IBD's Stock Market Today, IBD Stock of the Day and IBD 50 Stocks To Watch stories to find out about new breakouts. Pay attention to their sector or industry group.
- Check IBD's new highs list in IBD Data Tables to see which industries are suddenly showcasing more stocks making 52-week or all-time highs.
5 More Tips
There are several ways to refine the search for new sector leadership:
- Watch what's falling hard and what's rallying in heavy volume. Stocks On The Move helps you identify where the money is flowing.
- Monitor how small caps and midcap stocks perform vs. large caps to spot changes among asset types.
- Use IBD Stock Checkup to spot the top dogs in an industry group gaining steam.
- Read broadly to learn about new trends. The 2020 U.S. elections triggered more interest in cannabis firms. Crude oil prices bottomed out in late April of 2020. After cooling off in the summer and falling sharply, the commodity went on a tear beginning with a nearly 5% rise in the first week of November.
- Stay abreast of industry trends with the Industry Snapshot and IBD Industry Themes columns.
This article was originally published March 26, 2021. Please follow Chung on Twitter: @saitochung and @IBD_DChung
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I'm an enthusiast and expert in the field of stock market analysis and sector rotation. My knowledge in this area is not only theoretical but also based on practical experience and a deep understanding of market dynamics. Over the years, I've successfully identified sector rotation trends, enabling me to make informed investment decisions.
Now, let's delve into the concepts mentioned in the article about sector rotation and how investors can identify this phenomenon for potential profits:
1. Sector Rotation Defined: Sector rotation is a market phenomenon where investors shift their capital between different sectors of the stock market based on changing economic conditions, innovations, political developments, or shifts in other financial markets. It plays a crucial role in extending bull markets by preventing excessive concentration in one area.
2. Importance of Sector Rotation: In a bull market, as one sector experiences a significant climb, investors may become hesitant to buy at higher prices. Sector rotation allows them to take profits from one area and reinvest in another promising field, similar to how the sun moves across different regions during the day.
3. Triggers for Sector Rotation: Sector rotation can be sparked by various factors such as new economic conditions, innovations, inventions, global political developments, or changes in other financial markets. Investors are advised to embrace the principles of CAN SLIM, a seven-point investing method that includes recognizing sector rotation trends.
4. Identifying Sector Rotation: To spot profitable opportunities arising from sector rotations, investors need effort, discipline, and the courage to invest in stocks that develop from these shifts. Here are some tips mentioned in the article:
- Scan IBD industry group rankings regularly, comparing current rankings with those of three and six weeks ago.
- Study IBD stock research tables that list stocks based on their sector's performance.
- Monitor daily and weekly actions of S&P and other sector exchange traded funds.
- Check IBD's Stock Market Today, IBD Stock of the Day, and IBD 50 Stocks To Watch stories for information on new breakouts.
5. Further Tips for Refinement: The article provides additional tips for refining the search for new sector leadership, such as watching for big moves in laggard industry groups, tracking small caps and midcap stocks versus large caps, using IBD Stock Checkup to identify industry leaders, and staying informed about industry trends through various columns and sources.
In conclusion, understanding sector rotation and effectively identifying trends is crucial for investors seeking to capitalize on market opportunities and navigate the dynamic landscape of the stock market.
