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Sector Rotation – How to Outperform the General Market

Posted by nexvucapital on January 26, 2013

The best formula for achieving above average returns in the market while reducing your risk is to invest into sectors before the crowd. The crowd always chases returns because they only feel happy buying what has already gone up. The strategic investor sells to this crowd and then moves capital to the sectors that are out of favour before the crowd arrives. The following chart demonstrates the market peaks by sectors over the past economic/market cycle. These sector rotation models have been around forever but the average investor has no need for knowledge when chasing returns is their modus operendi.

The Last Cycle

The current waiting of the S&P can tell us where the crowd is. The current weightings in Technology and Financials are approximately 35% of the entire weighting of the S&P 500. When we review our Economic Cycle graph above we see that these two sectors of the market are both early cycle out performers.

saupload_sectorweightcharts

Two of the most underweight sectors in the S&P 500 are Materials and Industrials with a further review of the above Economic Cycle graph we see that these sectors should soon be outperformers. Smart money is already moving toward these sectors in anticipation of the crowd. The commodity sector is now beginning its rise out of a bear market correction within a secular bull market as can be seen in the following chart. The crowd has yet to arrive.

Commodity Index

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