Time to Cycle

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Welcome back to your weekly lesson. I hope you are having a killer week and that I can add to it by dropping a bit of knowledge on you.

Today I am going to dive in sector rotation. The investment strategy of moving money invested in stocks from one industry to another as investors and traders anticipate the next stage of the economic/market cycle.

The concept is rather easy to grasp, but can be pretty fucking tricky to implement. A reason why it isn’t my favorite strategy. However, can’t hurt to be aware of it and if implemented and timed correctly it can be the shit.

OK, so here’s the gist. The economy is cyclical, known as the economic/business cycle. Which is as follows.

👉 Expansion: During the expansion phase the economy grows as measured by increases in the Gross Domestic Product (GDP).

👉 Peak: A peak occurs when the economy starts running out of steam, usually caused by higher levels of inflation that central banks try to tame by raising interest rates.

👉 Contraction: A contraction also known as a recession. Which happens when trade and industrial activity declines, causing rising unemployment

👉 Trough: A trough represents the low point in the economic cycle — also known as the early cycle phase

Historically, the economy goes through a complete business cycle every five years.

Sector rotation proposes the market also goes through a similar four-phased cycle and claims through historical data certain industries thrive at specific stages of the cycle. With this investors buy stocks in these industries at the period of the market cycle.

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Take it with a pinch of salt

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Sector rotation may sound extremely easy and logical in theory. However, due to the range of unknowns that can affect an entire industries performance, it can make the strategy an almighty bitch and half. As, if you invest capital into the wrong industry at wrong time, It can really cost you.

So why go through all this if it’s not a viable strategy? Well firstly, any added info is a bonus in the investments game (Knowledge = power).

AND it isn’t all useless. Like the title reads “take it with a pinch of salt”. One way of doing this is focusing on a few specific industries and know when they tend to flourish and drop. Another way is just to take on board and understand the market cycle and how there are periods where you can expose its repetitive nature.

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That’s all folks

Like I said earlier, sector rotation is not my first pick in the strategy draft.

For me there are simpler strategies that rely on detailed industry knowledge and company fundamentals, rather than trying to predict the future like some wishy washy tarot reader. Nevertheless, the logic behind it is solid, and offers some great information about the market, which you can run with and implement in your own strategies.

Like always. Not financial advice, Full disclaimer here

Have a good rest of your week,

Cheers.

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