Sector Rotation

In This Lesson

Trading based on sector strength and weakness.

Duration: 30 min

Overview

Trading based on sector strength and weakness. This lesson will provide you with practical knowledge and actionable insights you can apply to your trading immediately.

By the end of this lesson, you'll have a clear understanding of the concepts and be able to apply them in real trading scenarios. Let's dive into the details.

Key Concepts

Business Cycle Sectors

Different sectors outperform at different economic stages: early, mid, late cycle, and recession.

Relative Strength

Compare sector performance to S&P 500. Rising relative strength indicates money flowing in.

Intermarket Analysis

Bonds, commodities, and currencies provide sector rotation clues.

Fund Flows

Track ETF money flows to see where institutions are rotating capital.

Practical Application

Now let's put this knowledge into practice. Follow these steps to apply what you've learned:

1. Track 11 sector ETF performances weekly (XLK, XLF, XLV, XLE, XLI, XLY, XLP, XLB, XLRE, XLU, XLC)
2. Calculate relative strength: sector ETF price divided by SPY price
3. Identify sectors with improving relative strength over 4-week period
4. Confirm with volume: increasing volume in rising sectors
5. Enter sector leaders within rotating sectors, not the ETF itself
6. Set stops based on relative strength breakdown, not just price

Common Mistakes to Avoid

Chasing Last Month's Winner

Buying the best performing sector after it's already moved ensures buying tops.

Ignoring Market Regime

Sector rotation patterns differ in bull vs bear markets. Using wrong playbook fails.

Too Frequent Rotation

Switching sectors weekly based on noise creates losses and tax consequences.

Key Takeaways

Sector rotation is one of the most powerful portfolio strategies
Leading sectors can outperform by 20-30% annually
Rotation provides early warning of market regime changes
Patience is key - rotations last months, not days
Combining sector rotation with good stock selection multiplies returns

Your Next Steps

Ready to continue your learning journey? Here's what to do next:

• Review this lesson's key concepts
• Complete the practical exercises
• Take notes on what you've learned
• Practice with a demo account
• Move on to the next lesson when ready