Sector Rotation

Sector Rotation

Last week, I discussed the advisability of examining periodic corrections or pull-backs in the stock indexes. Particularly when January results are negative, one should be ready for the end of a bullish trend.

From what occurred last week, the weather forecast for stocks looks better again, just like our physical weather this week. The volume of trades was not as high as one would like, but the change in prices is always the very best indicator of all. Since the low point on Monday, February 3, the S&P 500 rose 5.55 percent and is now less than one percent below its mid-January high.

So how else can we profit from a mid-course correction in a bull market? Sector rotation is an important principle during the life of a rising market. What is that?

Different sectors within the economy rise and fall in their market values somewhat independently. In the simplest breakdown, there are at least nine major sectors of companies with similar products or services. These include broad categories such as Healthcare, Financial, or Technology.

But many other divisions exist and there is little agreement about how many there should be. For example, Morningstar, Inc., the research giant, uses 31 major categories of companies.

For the year ending December 31, the top two categories were Internet at 81 percent gain followed by Aerospace/Defense with 56 percent. At the bottom of the 31 were Real Estate and Metals & Mining at positive 2 and a 22 percent loss for 2013 respectively. It obviously makes a big difference.

If you are paying attention or you have hired someone to pay attention for you, you can determine shifts in these sector trends and adjust your portfolio accordingly. The Real Estate group has now moved from awful in 2013 to second from the top this year through last Friday, February 14. The number one category thus far is Drugs with a 9.2 percent gain. Sixteen out of 31 groups were showing a loss in the same period.

You do not need to jump around like popcorn to improve your overall results. But since ETF’s and other mutual funds are now so readily available and generally inexpensive to trade, this kind of process is possible in most situations. While there are no perfect results, perfection is fortunately not required for good results either. Trends are your friend.

(Past performance is no guarantee of future results. All statistics from Worden Brothers, Inc., 2014.)

February 19th, 2014|Categories: Economy, Investment Management|