Sector rotation is also part of Pring’s business cycle analysis. A graphic helps explains how this works…
The graphic above shows one complete market cycle – a trough (or “valley”) on the left, a peak in the middle, and another trough on the right.
The basis of a sector rotation strategy is this: some sectors perform best heading into market peaks while other sectors perform best heading into market troughs.
More precisely, during a bearish market that follows a stock market peak, the Consumer Staples (XLP), Health Care (XLV) and Utilities (XLU) sectors typically outperform the market. Once the market has bottomed, typically it’s the Technology (XLK), Financial (XLF) and Consumer Discretionary (XLY) sectors that lead the recovery.
Likewise, in a strong bull market the Industrial (XLI), Materials (XLB) and Energy (XLE) sectors are usually the strongest performers.
Knowing just two things – where we are in the current cycle and which sectors perform best during that stage – can give you a significant edge in the market.
Of course with investing, timing is everything…
If you’re the type of investor who likes buying stock and selling a year or more later, the traditional business cycle model may work well for you. If you prefer being out of the market at the close of each day, like a day-trader, it will be mostly useless. In current markets, you want to be thinking more like a trader than a traditional investor.
Personally, I focus on “swing trading,” meaning I usually hold investments for a couple of months only. I’ve found this is the sweet spot timeframe. It’s long enough for market moves to develop. And it’s short enough so I’m not at the mercy of an earnings report that’s several quarters into the future.
So with my goal of holding investments for a two- to three-month period in mind, I simply focus on sector rotation patterns that match that duration.
Analyzing the shorter cycles allows me to be nimble. I can hop on a hot Energy sector for a couple months in the summer, and be out by September. Then, I can invest in the Consumer Discretionary sector heading into the holiday shopping season, and be out by January. And I help my beta testers do the same with my Cycle 9 Alert service, which will be ready for you to try any day now.
In the meantime, take a page from Pring’s book – study the cycles, then invest in the hottest sectors accordingly.