Use this page in conjunction
page to complete the "Big Picture".
Money on the move leaves a trail... learn to follow it.
Every day, traders have an interest in sector or industry
rotation. Swing traders more so, and of course investors are
really interested. What you see below is the big picture
regarding economics and market relationships. Try to get an
appreciation for it as money in the market moves
according to economic principles (supply and demand) within
YOU WILL NEED A TRADING COACH TO SORT IT ALL OUT!
**If you plan on trading the
popular ETFs (Exchange Traded Funds) you had better
understand sector rotation and all that if implies. This
applies to everything in
not only ETFs.
you found $10 on the ground and a few steps later found a
$20, and later still a $50 and so on- you'd could say
you're on to something– a trail of money.
**Don't get lost in the minutia of economics
shown on this page and links. I want you to understand WHY money
moves around. Know the relationships of one event to an industry
or sector and how it can be to your advantage to anticipate where that
money will flow to or out of if "X" or "Y" happens. We improve our odds
and that's what it's all about.
It is hard to
hide billions and billions of dollars flowing into
or out of a sector of the economy. It leaves a
trail like an elephant walking through cheesecake...
welcome to Sector Rotation. Need proof? This late
2006, look at the money (charts) going into the gold
sector in the last year or coming out of housing in
the last 18 months or going into oil in the last two
Sector/Industry Symbols for charts
Although what you will learn is generally for
swing or position trading, if you insist
on day trading be warned:
Risk in Day Trading
Sector rotation (money moving from one sector or industry to an
other) occurs every day in the marketplace. The result of
economic relationships forces money managers/traders to move their
funds before stock prices in some sector drops sharply. The
sectors I am looking for are the sectors that are making or have
been making the market behave a certain way, trending up or down for
the past few days or weeks or even months. The rotation comes
from money, lots of money from mutual funds, hedge funds, etc.,
leaving one sector, such as the drug sector or oil sector or
transportation sector and starts going into sectors that benefit
from those same factors which are negatively affecting the sector
being drained. Sector rotation plays tend to be of longer
durations because money rotates according to basic economic
circumstance that requires time to set up, trend w/inflow, then
reverse, and trend w/outflow of volume. For example, oil
prices go up, transportation stocks go down but oil stocks move up;
interest rates move up, housing and financial stocks go down and
consumer staple stocks go up; interest rates go down, retail stocks
go up...etc. It is all about cause and effect and
relationships. Sometimes that rotation is a one-day
wonder based on big news affecting a major company in a sector.
Everything in the sector jumps or falls but the reason there is no
follow through in that sector is due to the news being company
specific, not sector specific. So unless I am day trading I am
not really interested in that sector.
Watch a dynamic demo of interest rate fluctuations and
especially an inverted yield curve and its effects on the
You benefit from this rotation by being able to identify
which sectors are going up or down establishing a trend. A
trend up is higher highs and higher lows and a downtrend is lower
highs and lower lows. We are not interested so much in the
day-to-day rotation as we are in trending rotation, i.e. those
sectors leading the market up/down over a verifiable trend and time.
In short, a trend that has substance or legs to it.
Though this daily sector rotation might appeal to day
traders, the sector rotation I'm speaking of is more basic than that
and tends to be of much longer duration because it is tied to
changes in the economy which happen over time not overnight. I
am looking for those sectors that have been pushing the market in
one direction or another in recent weeks, if not months.
I review the rotation behavior weekly during my
routines. Probably the most comprehensive of sector
rotation sites are
www.barchart.com. I will show you how to use these during
our sessions. For ALL the sector/industry symbols known to man
visit stockcharts.com on this specific page, click
here. These are great sites to
spend time on the weekend seeking trades in the right sectors for
the coming week.
If big institutional money
moves the markets, shouldn't you be following that money?
Institutional money managers are not day traders. They are
following the sector strengths and weaknesses
to a perceived environment
for many months in the future because of basic changes in the
economy and thus trends develop.
You and I know that, even if they are correct, prices rise and
fall in a longer term trend. Of course we traders want to
take advantage of that.
Is it even possible to be
short the sector that is being drained while I'm long the
sector that rising? Yes. The ultimate that I am trying
to do is identify and participate in those sectors that are
pushing the broad markets. You only have to look at the
metals sector, the oil sector and gold sector in recent months
(2006) to see how strong they have been. Could you enhance
your trading by working in these sectors, the sectors that in fact
are gaining or losing so much big, big money that their momentum
has a life of its own? I believe you can and should.
I used to say try to stay on
top of the rotation, now I say,
you must see the big picture. Ultimately, you will have
a stock, a sector and a market all going in the same direction.
Pull up all three charts, the S&P500
sector chart you're interested in and the stock chart
at the same time. Do they support each other? If so,
you have just enhanced your probabilities...isn't that what we're
trying to do, to put the odds in our favor? You bet it is!