Est. 2002


Economic sector and industry rotation relationship trading.

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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 an economy.


If you plan on trading the popular ETFs (Exchange Traded Funds) you have to better understand sector rotation and all that if implies. If 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.  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 years 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 market... here.

     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.stockcharts.com and www.barchart.comI 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 looking forward 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 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.  Ultimately, I am trying to identify and participate in those sectors that are pushing the broad markets.  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.

     You must stay on top of the rotation to 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 chart, the 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?

      Rotation occurs through many time periods.  As swing traders we are concerned with the trends this week or the past few weeks. The government announces 27 indicators about the health of the economy every month.  They move markets-  they can and do induce rotation, sometimes for a short time, sometimes for many months.

sector rotation events

Consumer Expectations:   
Industrial Production:        
Interest Rates:                 
Yield Curve:                     

Full Recession
Bottoming Out
Early Recovery
Bottoming Out
Normal (Steep)
Full Recovery
Rising Rapidly (Fed)
Flattening Out
Early Recession
Falling Sharply

     Study the Yield Curve and you can see the relationship between rising and falling rates to the stock market.  You need to be aware of where we are in these cycles...if you simply read the daily/weekly market recaps you'll find out.  Where are we now? 


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