Sector Rotation in the new normal

Sector rotation is always happening between and within sectors, and there are many forces at play, both micro and macro. A well balanced portfolio will have exposure to many sectors/asset classes, the key is the weighting and hedging (protecting). Cyclical short-term and mid-term trends often have more to do with economic minutiae, and although we often discuss and trade short-term to mid-term, we also deploy our capital as strategic investors with the longer term trends and challenges in mind.

Between unprecedented rampant central bank intervention and policy makers attempting to appease everyone and band-aid everything, classical sector rotation appears a thing of the past. Economies of the world are in uncharted territory, there is nothing normal about the markets today. So what is sector rotation in the new normal? Nobody can say with certainty, however one thing apparent to us at SectorRotation.com is that the wealthy people of this world are a lot more strategical than tactical by a long-shot.


Nobody has a crystal ball, however one thesis in any sophisticated long-term strategy is in understanding that there is a tug-of-war going on between inflation and deflation (In the short-term it appears deflation has the upper hand, but that can and will change). This confuses many people because they understand one or the other, but it’s challenging for them to keep both things in mind at the same time.

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Short-term speculation: Apart from speculative event driven scenarios (e.g. earnings and economic calendar events) and maybe seasonality strategies (which are hit and miss), there is no short-term investment strategy other than identifying the current trends.

Typically, cyclical growth sectors (finance, energy, technology, etc.) are expected to outperform the broader market in an advancing market and under-perform in a declining market. Defensive sectors (utilities, healthcare, staples, etc.) are expected to do just the opposite.

To better understand the principles of sector rotation read the following insight:

Additional insight on Sector Rotation (URL's):

Maximizing Alpha with Sector Rotation: 'Alpha' is the excess return on a risk-adjusted basis relative to the return of a benchmark index. The days of 'buy and hold' is no longer the preferred pathway for many investors; the new mantra is to employ sector/portfolio rotation. In order to do this effectively investors must be willing to take the time to check which way the wind is blowing (figuratively) on a regular basis.

The basic premise, for some, is to take gains off the table from what is working and rotate into another sector that has upside potential and alpha. Ideally, you want to try to look at the flow of capital in and out of different sectors along with sentiment. Understanding market sentiment is key as it can turn fast, once the sentiment starts turning negative and the flow is out of a particular sector or particular ETF you also want to lighten-up/exit out (or weight toward cash or cash alternative). Then when the sentiment turns positive you want to look at which sectors offer the best possible return for the money and allocate to them.

Smart sector rotation is often blurring the line with risk mitigation as our trading actions do not always involve actual 'rotating' via selling one asset class to buy into another. How decisions are made when employing sector rotation depends on your criteria, methodology, discipline, and execution strategy (which is often tied to the amount of capital you are responsible for). There is no one right way and it seems everyone is different in their approach; some employ the use of fundamentals along with technical analysis, others may totally ignore fundamentals and only employ algorithms, and others may look only at simple facets of technical analysis.