What Is Sector Rotation? To Profit From It, Use These 10 Tips

What is sector rotation? And how can an investor identify this phenomenon to make profits in the stock market?


Simply put, it helps bull markets run longer. Why?

When one area of the stock market goes on a big climb, investors naturally become reluctant to buy at higher prices. They take profits and reinvest the capital in another promising field. The sun rises in the U.S. and Canada during the morning, then sets in the evening. But the sun then begins to shine in the Asia-Pacific region. Then it travels to Europe, Africa and South America. A good bull market acts in a similar way.

Sector rotation can get sparked by new economic conditions, new innovations or inventions, new developments in global politics, or new moves in other financial markets. So embrace the N in CAN SLIM, IBD’s seven-point paradigm for successful stock investing.

Sector Rotation: 10 Tips

It takes effort and discipline to spot profitable opportunities that arise out of rotations. And you need the courage to buy those stocks that develop from those shifts. A large index such as the S&P 500 is not going to telegraph you signs of rotation.

Here are ways to spot sector rotation:

  • Scan the IBD industry group rankings at IBD Data Tables at Compare the current ranking with the rankings three and six weeks ago to detect shifts. MarketSmith also displays rankings one week ago, as well as three and six months earlier. You can also rank the 197 Industry Groups list by year-to-date change. Look for big one-day percentage moves by laggard industry groups. It could be the start of a major rebound.
  • Study the IBD stock research tables. They do not list stocks alphabetically; instead, stocks get ordered based on their sector’s performance. Check the list regularly to spot key changes in the sector rankings.
  • View the daily and weekly action of S&P and other sector exchange traded funds. The Financial Select Sector SPDR (XLF) fund made an enormous gain in the week ended Nov. 13 that sparked a terrific advance. It jumped 8.3% in the heaviest weekly turnover in five months. At the time, JPMorgan Chase (JPM) broke out past aggressive entries. It also cleared a big cup with handle at 123.60.
  • Scour IBD’s Stock Market Today, IBD Stock of the Day and IBD 50 Stocks To Watch stories to find out about new breakouts. Pay attention to their sector or industry group.
  • Check IBD’s new highs list in IBD Data Tables to see which industries are suddenly showcasing more stocks making 52-week or all-time highs.

5 More Tips

There are several ways to refine the search for new sector leadership:

  • Watch what’s falling hard and what’s rallying in heavy volume. Stocks On The Move helps you identify where the money is flowing.
  • Monitor how small caps and midcap stocks perform vs. large caps to spot changes among asset types. The iShares Russell 2000 (IWM) ETF rallied more than 10% over two weeks through Oct. 9. It was a remarkable gain, given that the SPDR S&P 500 (SPY) gained just 5.5% over the same time frame. SPDR S&P Mid Cap 400 (MDY) shot almost 10% ahead.
  • Use IBD Stock Checkup to spot the top dogs in an industry group gaining steam.
  • Read broadly to learn about new trends. The U.S. elections triggered more interest in cannabis firms. Crude oil prices bottomed out in late April of 2020. After cooling off in the summer and falling sharply, the commodity went on a tear beginning with a nearly 5% rise in the first week of November.
  • Stay abreast of industry trends with the Industry Snapshot and IBD Industry Themes columns.

Please follow Chung on Twitter: @saitochung and @IBD_DChung


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