Sector rotation
Encyclopedia
Sector rotation is a term normally applied to stock market
trading patterns. In this context, a sector is understood to mean a group of stocks representing companies in similar lines of business.
For example, an investor or trader may describe the current market movements as favoring basic material stocks over semiconductor
stocks by calling the environment a sector rotation from semiconductors to basic materials.
Sector Rotation Models exist primarily to help investors identify and participate in new trending sectors of the stock market
. A sector rotation investment strategy is not a passive investment strategy like indexing, and requires periodic review and adjustment of sector holdings. Tactical asset allocation and sector rotation strategies require patience and discipline, but have the potential to outperform passive indexing investment strategies.
The primary driver of sector rotation is the variability of currency
values (inflationary, disinflationary, or deflationary) and interest rates. As the economy expands, demand for raw materials creates inflationary pressures, which in turn prompt higher interest rates, which increase the value of the currency, which reduces the competitiveness of a country's exports as the currency causes them to cost more to other countries. This final stage causes the economy to contract, reducing demand for raw materials, which creates deflationary pressures, which in turn prompt lower interest rates, which decrease the value of the currency, which increases the competitiveness of a country's exports—creating a new market cycle. The relative strength of commodities, bonds, currencies, and stocks shift in this changing monetary climate in a somewhat predictable manner.
Stock market
A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...
trading patterns. In this context, a sector is understood to mean a group of stocks representing companies in similar lines of business.
For example, an investor or trader may describe the current market movements as favoring basic material stocks over semiconductor
Semiconductor
A semiconductor is a material with electrical conductivity due to electron flow intermediate in magnitude between that of a conductor and an insulator. This means a conductivity roughly in the range of 103 to 10−8 siemens per centimeter...
stocks by calling the environment a sector rotation from semiconductors to basic materials.
Sector Rotation Models exist primarily to help investors identify and participate in new trending sectors of the stock market
Stock market
A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...
. A sector rotation investment strategy is not a passive investment strategy like indexing, and requires periodic review and adjustment of sector holdings. Tactical asset allocation and sector rotation strategies require patience and discipline, but have the potential to outperform passive indexing investment strategies.
The primary driver of sector rotation is the variability of currency
Currency
In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
values (inflationary, disinflationary, or deflationary) and interest rates. As the economy expands, demand for raw materials creates inflationary pressures, which in turn prompt higher interest rates, which increase the value of the currency, which reduces the competitiveness of a country's exports as the currency causes them to cost more to other countries. This final stage causes the economy to contract, reducing demand for raw materials, which creates deflationary pressures, which in turn prompt lower interest rates, which decrease the value of the currency, which increases the competitiveness of a country's exports—creating a new market cycle. The relative strength of commodities, bonds, currencies, and stocks shift in this changing monetary climate in a somewhat predictable manner.
External links
- http://stockcharts.com/charts/performance/perf.html?[SECT | Sector Rotation Perfchart with Ideal Model]
- Sector Rotation Investing Guide