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What is Sector Rotation Strategy in Stock Market

Sector Rotation Strategy

What is Sector Rotation Strategy in Stock Market ?


What is Sector Rotation ?

When investors anticipating a potential change in the stock market cycle decide to move their invested capital from one stock market sector to another, it’s called sector rotation. To move the investment, the investors simply sell their specific sector’s funds and stocks and accumulate money from the market. After that, they invest this money in another sector or industry. However, they use the sector rotation strategy to determine the overweight and underweight sectors and which sector they should invest in.

Through this process, the investors get a chance to capitalize when the country’s economic condition changes. Moreover, the sector rotation allows the investors to get higher returns. However, most investors choose this method to increase their return because it’s an active investment method. When the shareholders buy stock and financial assets and hold it for a long time, such as decades or years, it’s called passive investing strategies.


Sector Rotation’s Working Process

The investment takes various sectors’ economic movements or growth’s advantages through the sector rotation process by rotating in and out of it. The economic cycle’s two significant parts are expansion and recession. During this economic cycle, the investment rotates in various sectors as economic changes significantly affect some sectors.
Now rotating the investment in and out of all these sensitive sectors will result in higher returns for the investors. However, we are presenting a sector rotation chart to understand it in a better way.

Sector Rotation


How to Identify Sector Rotation in Stock Market

The sector rotation analysis will help you to identify it. However, the analysis consists of the following three stages. The stages are:

Stage 1: Signals economic recession or shows the contraction of the economy. The decline in interest rates causes the bonds to turn up.
Stage 2: Marks a bottom in both the stock market and the economy
Stage 3: When there is improvement in the business cycle, and the economy prepares to upgrade in the expansion phase, sector rotation will represent a massive improvement.

Now, analyzing the stock market in the above 3 phases, the investors can identify the stock market’s sector rotation.


Economic Cycles Types Contribute to Trigger Sector Rotations

Different types of economic cycles are the contributing factors behind the stock market sector rotation. Some of the cycles include the stock market, economic, and oversold or overbought cycles. Let’s discuss each type of cycle that triggers the sector rotations.


1. Economic Cycles

The economic or business cycle is the inevitable part of the global economy, and it moves in a cyclical pattern. However, the economic cycles consist of four significant patterns, and those are the following:

  1. Expansion – Mid-cycle phase
  2. Peak – Late-cycle phase
  3. Contraction – Recession
  4. Trough – Economic cycle’s low point

Almost every five years, every economy goes through these above four business cycles phases.

2. Market Cycle

Like the global economy, a four-phased cycle contains in the stock market. The cyclic phases are the following:

  1. Accumulation Phase – Occurs at bear market’s bottom
  2. Mark-up Phase – Bull market
  3. Distribution Phase – Stock prices gain momentum
  4. Mark-down Phase – Bear market


What is Sector Rotation Strategy?

The investors use the sector rotation strategy, giving weight to different sectors according to their performance and risk management. As a result, the investors hold the weaker sectors in the underweight position and the strong sector in the overweight position.
The sector rotation strategies work in a particular motto during the economic cycle’s different phases (including expansion and recession). Its motto is to gain advantages from every industry’s historical performance and economic movement. This rotation strategy can describe from two perspectives, i.e.,

  • i) Economic recession and
  • ii) economic expansion.


1. Economic Recession

A specific sector’s stock price may tend to decrease during a recession. It means that their stock prices are cyclical. And during the off period, the investors experience the stock market’s poor performance. For example, the following stock market’s price may fall during an economic recession.

  • Consumer discretionary
  • Real estate
  • Communication services and
  • IT (Information Technology)

However, following the rotation strategy, the investors would like to sell the above sector’s stock. And they would like to rotate their investment in that sector on which the economic contraction has less impact. Now according to the rotation strategy, after selling assets and collecting money, the investors can further invest in the following sector to get higher benefits:

  • Healthcare
  • Consumer staples
  • Utilities

The economic contraction’s impact has less on these above sectors. Thus investors would like to rotate their investment in these above sectors. And this whole investment rotating process is called the sector rotating strategy.

2. Economic Expansion

Once again, the investors try to take advantage of the rotation strategy during the stock market’s mark-up phases and accumulation. During the accumulation phase, the investments rotate strategy work by investing in value stocks. And again, in the mark-up phase, the investor will rotate their investment into growth socks.
However, how complex or straightforward the rotation strategy would be it significantly depends on the investors. Simply moving among the stocks into two main categories, the investor can enact this strategy in their portfolio.


Legendary Lost Sector Rotation

The Legend and Master Lost Sectors are attractive options to Destiny 2. Using this sector, the players perform well in keeping the rotation and schedule track. In addition, the players can easily keep track because particular sectors seem easier compared to the others.
The legendary lost sector rotation daily takes place. In the lost sector, one Master and one Legend lost each day. Both the Legend and Master have an equal chance of dropping the Exotic Armor’s specific piece. Using the legendary lost sector rotation schedule, on each day, you can see the Master and Legend’s Exotic armor drops.

In the lost sector’s daily rotation, both the Master and Legend lost the sectors on a rotation basis. Are you trying to know which legendary lost sector rotation today is taking place? Have a look at the following table to know the details:

Date Legendary Lost Sector Rewards
February 12 K1 Revelation Exotic Chest Armor
February 13 Concealed Void Exotic Chest Armor
February 14 Bunker E15 Exotic Chest Armor
February 15 Perdition Exotic Chest Armor


Sector Rotation Models

The sector rotation model’s feature is to invest either in high-ranked bond or equity sectors, and it’s a risk-managed model. However, at which sector the investor will invest, whether its Bond sectors or Equity sectors, is determined by assessing the associated risk at each quarter.

The equity sector’s investment portfolio reallocation is formed monthly. On the contrary, the Bond sector’s portfolio reallocation was formed quarterly. The stock market contains various sectors. However, for various causes, some sectors drastically go one better than the other sectors at various times. Therefore, focusing on the best-performing investment sectors is one of the essential market-beating strategies.

SRM (Sector Rotation Model) helps investors keep peach with the stock market’s best performing areas. As a result, they earn a significant return by staying in tune with the market. This Model, at any given time, helps the investors to keep in tune with the best performing sector by utilizing the 11 sectors ETFs (Exchange-Traded Funds).


The Way of Increasing Returns Using SRM (Sector Rotation Model)

Using the SRM, an investor can significantly increase his expected return over a specific period. Each month, the SRM chooses the top-performing stock market’s sector and moves its investment accordingly. However, the investor can have a minimum trading cost per month by initiating only one trade. Occasionally in successive months, the Model may recommend the investor to invest in the same sector. But at the same time, an overgrowing sector may continue with its significant growth.

However, if there is a severe decline in the stock market, the built-in SRM mechanism will move toward cash. If the investor fears that the most substantial sector could produce a negative return, there is no value in being the top-performing sector. However, SRM has the in-built ability to avoid a significant decline in the market. And for this significant reason, it ensures outstanding performance in the market over time.

The investors can use the ARM (Asset Rotation Model) as the SRM shift to cash. They can use the ARM to check whether in the meantime the Bonds stock is a profitable investment or not. However, the investors even can achieve more significant results by utilizing ARM and SRM together. The sector rotation models offer the investors both less risk and high return.


Final Words

Investors will undoubtedly go through several economic cycles experiences in their entire lifetimes. For this reason, as an investor, you don’t need to think much about occurring these phases. However, investors who understand the sector rotation strategy can make a solid and successful decision. Their well-thought decision helps them to ensure long-term returns on their investment. The sector ratio, its Model, and strategy enable the investor to generate the greatest return on their stock market investment in the long run.