An Introduction to Sector Rotation Stock Strategies

If you are planning on investing in the stock market, sector rotation is a strategy that you might want to consider utilizing. Sector rotation is a very popular investment strategy that many individuals have implemented into their own portfolios. Here are the basics of sector rotation and how it can benefit you as a trader.

Sector Rotation

Sector rotation is an investment strategy that utilizes moving assets from one sector of the economy to the other. Economists have theorized that the economy goes through cycles that can be predicted. One area of the economy will be strong for a given period of time, and then another area of the economy will start to gain strength. If you can educate yourself and learn how the economy works, you could potentially beat the market. If you knew which part of the market was scheduled to increase in value, you could move your assets to that sector before it happens. Then you would be able to realize a substantial return on your investment when that sector goes through a strong business cycle.

Assessing the Market

The basis of this strategy comes from the research of the National Bureau of Economic Research. They are also known as the NBER. This organization spend a great deal of time and resources analyzing the economy. As part of their research, they were able to develop a pattern of cycles in the market. They were able to determine an average time that a sector would go through an expansion period, and approximately how long it would go through a recession as well.

Market Cycles

Historically, sections of the market go through cycles over time. There are 4 stages that the market will go through. The first stage of the cycle is known as the market bottom. This is when the prices of securities go down significantly. After this, a bull market will take place. This involves the prices of securities appreciating in value significantly. The next stage of the market is known as the market top. This is when the prices of securities reach the absolute pinnacle of their movement. The last stage of the cycle is known as the bear market. This is when prices start to go downward again. By recognizing which stage of the cycle a sector is then, you can make the right investment decision.

Economic Influence

Traditionally, these market cycles have greatly affected the economy of the country overall. When the bull market is leading the way to the market bottom, this usually leads to a recession in the economy. Businesses have a tough time making profits and usually end up laying off much of the workforce. After this, the market goes through a upswing and the economy starts to rebound. As the market gets back up to the top again, life is good in the economy. 

Investment Decisions

If you plan on pursuing a sector rotation strategy, you should make sure that you do a thorough amount of research. There are many stock experts out there that utilize this method and could potentially offer you some guidance on your investment decisions.

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