What is a Sector Rotation?

by Investing School on March 9, 2011

The term “Sector Rotation” is used to refer to specific patterns of trading on the stock market. A sector in this case means a specific group of stocks that represent companies engaging in similar types of business.

Investors, brokers, or traders may define market trends as being in favor of one type of stocks, such as raw materials, over another such as computer chips. This would mean that they were defining a sector rotation from computer chips to their raw materials.

There are models used to understand sector rotation, which can help investors to recognize and take full advantage of sector rotations within the stock market. Investors who use a sector rotation investment strategy are not involved in a passive investment strategy, because this requires reviews of the market and other adjustments within the types of sector holdings. This is a plan that utilizes discipline and patience, and can also perform better than many passive indexing investments.

Sector rotation is driven by currency value differences such as inflation or deflation, as well as interest rates. As sectors rotate there are changed within the creation of new market cycles, which can be predicted and tracked with some measure of accuracy. The comparative strengths of such elements as commodities, bonds, currencies, and stocks continue to shift due to variances in the monetary climate. However, these changes and rotations can often be tracked and predicted to offer insights and opportunities for investors in the sectors.

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