Pring on Sector Rotation

Sector rotation is also part of Pring’s business cycle analysis. A graphic helps with explaining how this works.

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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, other sectors perform best heading into market troughs.

After the stock market peaks, 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.

Personally, I focus on swing trading – meaning I usually hold investments for a couple of months. 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 earnrnings report that’s several quarters into the future.

So with my goal of holding investments for a two- to three-month window in mind, I simply focus on sector rotation patternrns that match that duration.

The business cycle model takes several years to play out. But these same sectors rotate in and out of favor over shorter timeframes, too. Analyzing these 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.

Take a page from Pring’s book – study the business cycle, then invest in the hottest sectors accordingly.