Introduction into Sector Rotations and Broad Market Overview
Some traders like to gamble. Some like technical patterns. Some like fundamentals
All can benefit by knowing what is coming next in the sector rotation. This is obviously “extra work” and when I first heard about it it seemed like something only dinosaurs did, and I didn’t need no sector rotation know-how to make money. Totally true. But if you are good at research or have a financial or economic background, this may appeal to you more than a standard technical analysis approach, and you may even find that its an area you excel at! Some people just cannot get the hang of scanning stocks or its too technically challenging for others. So consider another way to find investment ideas for people who might learn or process information differently, or like I do, just to enhance my overall trading. I think of it as a little detective work! If there is any information out there that can inform me to be a better trader, I want it!
Just like the seasons, sectors rotate throughout the year. An easy way to track these sectors is by the ETF’s that have Holdings of stocks within the sector. Some people track Indexes or specific groups of tickers for various rotation analysis. There’s no rules in investing, just what works for you.
For instance, the SMH ETF is a Semiconductors ETF. Some of the stocks it holds are AMD, NVDA and INTC.
If you have ever heard of stocks getting a “sympathy bounce” they are referring to a Sector Leader surging ahead of its Peers and then “sympathetically pulling” the rest of the stocks up with it.
When a stock leads the sector these are obviously called “sector leaders“. Stocks that consistantly lead their sector are also often the stocks that recovever first and strongest after times of crisis and are usually more resilent to struggle, have more cash on hand and have shown exceptionalism in adapting their business during challenging times.
True Market Leaders
These rare stocks are referred to as “True Market Leaders”. I keep a watchlist of such stocks. A few on my list from this most recent market crash are sector leaders such as DXCM, AMD, AAPL, DIS, NFLX, CHWY, DDOG, OKTA and so on. I try to keep this list as diverse as possible without duplicates and when I am having a losing streak, I often rely on these for an easy pullback-swing-trade to regain some capitol safely – as these stocks are more stable than most and have more reliable, consistant, and tradable price action. True market Leaders are a great entry into trading bcause you can wait-out many mistakes if price turns against you and you don’t have to hover over these all day. I can’t recall a (properly selected) TML that did not recover fully if I got in early or had bad luck. (though I’m sure theres a few but not in a long time).
True Market Leaders (TML’s) are always well above their 100 and 200 Daily SMA. In times of crisis they can test their 50 but rarely the 100. Pullbacks-setups are very easy with TML’s. ( https://chrt.biz/CHWY/12425dwg1bq/chart/ )
There are four parts of a rotation. I will let you read more about it here if you want (https://bit.ly/38BRP63)
There are several ways to look at sectors. The first is an RRG or Relative Rotation Graph
You can plug any ticker into an RRG chart but this has the sector ETF’s already in the URL. As you can see, it displays each sector ETF in of the four cycles phase (Lagging, Improving, Leading, Weakening, or early, Mid, Late, Recession. Sector leaders will be the first to break into a new cycle. Not all stocks in a sector will share the same benefit of a rotation. While there are sector leaders, there are also sector laggards.
Aside from just interna leaders and laggards in a sector, certain sectors are often not in a growth phase at the same time. For instance, when Software has had a good run, usually they will begin to weaken while Semi’s take their turn. So you would want to focus on your AMD’s and not your ADBEs.
Glancing back at our RRG chart, we see that XLF (Financials ETF) has gone from lagging to improving.
Let’s investigate further.
Back at Barchart.com we can pull up a PerfChart with the predefined “S&P Sector ETFs” ( https://stockcharts.com/freecharts/perf.php?[SECT] )
I like to click the Line Graph icon on the bottom left. Here we see a line chart with the same information. You can plot these on platforms with trendlines just like you would price action. When sectors are coming out of recession, they break their trend line just like a stock. You can see what ones are rebounding fastest right now and what ones are breaking their uptrend and going bearish.
If you click the Labels at the top, it will compare all other symbols to the one you click. (S&P is the default).
Sector Summary Breakdown
We want to get in early, before a sector is in full rotation. To do this, we want to catch a sector just as its market leader is making a move (usually). Since we are looking at the financial ETF, I will go to ETFDB to find out the top holdings. https://etfdb.com/etf/XLF/#holdings
Here we can see what stocks the XLF ETF is comprised of. If we go back to our RRG chart that we changed to a Line Chart (Predefined Sector ETFs), we can enter in some tickers from the ETF holdings into our perf chart at the top text box.
with XLF,BRK.B,JPM,BAC,C,WFC,BLK,GS,AXP,MS (you can pick ones you are interested in)
Hit enter and then click Financials (first box). the XLF is our baseline and we are comparing the tickers it holds against it. Now we can very clearly see which stocks are surging and which are lagging. From here you can use standard technical analysis of Higher/Lower Highs and Lows, trend lines and retracements/reversals.
At this point, I like value stocks, so I would look for stocks on the bottom where many have not made a move yet, and identify one that is breaking out from the pack. I would want it to show signs of upward direction at pace faster and more extreme than the baseline or its peers. Others might want stocks that are surging and on a pullback but still above the baseline.
One more specific way to use this to make money – often times when the sector leader makes a move ahead of its peers, others within the sector will follow suit with the same general price action on a chart. This happens for a number of reasons, part of which is because there is a lot of volume investing into Funds that then invest into all the holding companies. Because of this, money is divided amonst the peer group but at a different holding percentage, causing leaders to move ahead so early. By identifying the price pattern that a market leader sets, you can sometimes identify the same pattern on laggards within the sector and capitalize on the repeat of the same breaks outs and price action.
(Moderator: I have no affiliation with any person, or website mentioned. I am just offering resources. Please do not delete this post.)
https://stockcharts.com/ is one of my favorite resource for analysing sectors. The charts there were made for this sort of thing and theres tons to choose from, from commodities, markets, and so much more.
https://etfdb.com/ is great for ETF research.
You can apply RRG analysis to anything you want to compare, not just sectors. You might compare how various Futures compare to their Micros. Find your own way to use information that works for you.
If you want to use twitter for some ideas discussed in this article, I find the # tml hashtag (true market leader) is full of good mentors. @ tmltrader is one of my favorites to follow
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Good Luck. Be Safe.