What is sector rotation? And how can early detection give investors learning to invest an edge in the market? Learn how to use IBD's proprietary stock lists and tools to spot early shifts in market signals and price momentum.
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ALEXIS GARCIA: What is sector rotation, and how can an investor identify this phenomenon to make profits in the stock market? 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.
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. 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 like the S&P 500 is not going to telegraph you signs of rotation.
Here are several ways to spot sector rotation using IBD tools. First, scan the IBD industry group rankings on IBD data tables at investors.com. Compare the current ranking with the rankings from three and six weeks ago to detect shifts. MarketSmith also displays rankings going back to the previous week as well as three and six months earlier. You can also rank the 197 industry groups list by year-to-date change.
Investors should focus on stocks in the top quartile of IBD's groups to find winning stocks. But a big jump in group rank, say from 120 to 80, can also help uncover a group's blossoming strength. You can also look for big one-day percentage moves by laggard industry groups. It could be the start of a major rebound.
Another way to spot sector rotation is to study the IBD stock research tables. They don't list stocks alphabetically. Instead, stocks get ordered based on their sector;s performance. Check the list regularly to spot key changes in sector rankings. You can also view the daily and weekly action of the S&P and other sector exchange-traded funds. For example, the S&P 500 Financial Sector ETF, ticker XLF, made an enormous gain in November, 2020 that sparked a terrific advance. It jumped 8.3% the week of November 13 in the heaviest weekly turnover in five months. At the time, JPMorgan Chase broke out past aggressive entries. It also cleared a big cup with handle at $123.60.
When a number of stocks from the same industry group are seeing breakouts and extended gains, this is yet another strong sign of sector rotation. Also be sure to scour IBD Stock Market Today, IBD Stock of the Day, and IBD 50 Stocks to Watch stories to find out new breakouts. Pay attention to their sector or industry group. Check IBD's new highs list and IBD data tables to see which industries are suddenly showcasing more stocks making 52-week or all-time highs.
Once you've used the tools to spot sector rotation, there are several ways you can refine your search to find new sector leadership. Watch what stocks are falling hard and what's rallying in heavy volume. IBD's Stocks on the Move helps you identify where the money is flowing. Monitor how small-caps and mid-cap stocks perform versus large caps to spot changes among asset types. IWM, the iShares Russell 2000 ETF, rallied more than 10% over two weeks in late September and early October, 2020. It was a remarkable gain given that the S&P 500 gained just 5.5% over that same time frame.
The S&P 500 Mid Cap 400, tracked by the MDY ETF, shot ahead almost 10%. Those gains marked the beginning of strong advances for small caps and mid caps. Use the IBD Stock Checkup Tool to spot the top dogs in an industry group gaining steam and read broadly to learn about new trends. You can stay in tune by reading the industry snapshot and IBD industry themes columns published every week.
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