2/27/2015

UnderstandingSectorRotation:TechnicalAnalysisPrimerTheStreet

UnderstandingSectorRotation:
TechnicalAnalysisPrimer
By JonasElmerraji

| 06/08/1104:54PMEDT

ExclusiveFREEReport:JimCramer'sBestStocksfor2015.

BALTIMORE(Stockpickr)Asaninvestor,theideaofsectorrotationsoundssimple
enough:It'sthepracticeofportfoliomanagersshiftingtheirallocationsfromone
sectortoanothertobeatthebroadmarket.Butwhiledescribingsectorrotationis
simpleenough,implementingasectorrotationstrategyforyourownportfolioisa
wholedifferentstory.
InthisTechnicalPrimer,we'lltakealookathowsectorrotationworksandhowyou
cantellwhenit'stimetorotateyourowninvestmentmix.
Tostart,sectorrotationreallyisn'tthebestphrasetodescribewhatwe'redoinghere.
Whilethetermgainedpopularityamongmutualfundmanagers,whowerelockedinto
stocksbytheirfunds'restrictions,assetrotationishardlylimitedtothestockmarket.
Instead,assetrotationcanreallybeappliedtoallassetclasses,includingbonds,
commoditiesandevencash.

Related:DoesTechnicalTradingReallyWork?
Sowhileassetclassrotationisprobablyabetterterm,we'llstickwiththeregularly
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2/27/2015

UnderstandingSectorRotation:TechnicalAnalysisPrimerTheStreet

acceptednomenclatureforthetimebeing.
Oneofthekeystosectorrotationistheideathatallmarkets(orassetclasses)are
connected.That'snotsomesortofnewageconceptinstead,ithasalottodowith
theflowoffundsfrominvestorstothemarketplaceandwithaggregatesupplyand
demand.It'simportanttorememberthatinvestors'resourcesarefinite.Thatmeans
thatinvestorshavetomakeachoiceaboutwheretheyplanttheirassetscapital
flowingintooneassetclass(suchasstocks)generallymeansthatcapitalisflowing
outofanother(suchascashdeposits).It'sthatrelationshipthat'scoretosector
rotation.
UnderstandingBroadMarketRelationships
Toknowhowtorotatebetweenassets,it'snecessarytobealittlemorefamiliarwith
howtherelationshipsbetweendifferentmarkets(knownasintermarketrelationships)
work.Thesimpleversionbreaksthemarketdownintothreemarkets:bonds(or
interestrates),stocksandcommodities.
Generally,bondsleadstocks,andstocksleadcommodities.
Inotherwords,atypicalinvestmentcycleconsistsofabondrally,whichisfollowedby
astockrally,whichisthenfollowedbyacommodityrally.Theoppositeistrueaswell
weaknessinbondsgenerallyprecedesweaknessinstocks,whichinturnprecedes
weaknessincommodities.Notsurprisingly,theserelationshipsaredueinlargepartto
thecausalitybetweenthesedifferentmarkets.Inthiscycle,forinstance,stocksarein
themiddleoftheirdecliningphaseasrallyingcommoditiesputthesqueezeon
margins.

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