Tackle Today: The Circle of Life
February 21, 2019
≈ The wheel of fortune. ≈
On our 7-Step Guide to Trading, we teach that the first step in becoming a proficient trader is to conduct market analysis, the famous top-down approach. The goal is to develop an opinion, a market posture. Based on that market posture, you will choose the right candidates and strategies to trade.
One thing you’ve got to be aware of, though, is sector rotation; Nature’s circle of life inside the financial markets.
The definition of sector rotation is pretty straight forward: it consists of an investment strategy involving the movement of money from one industry sector to another. Usually, investors are driven by higher returns, taking advantage of cyclical trends in the overall economy.
Selecting the right financial assets to trade is important, don’t get us wrong, but choosing the appropriate areas of the market to invest in is crucial. This way, you maximize returns and control downside risk.
Sector rotation comes in waves. Money usually flows first into big names in the sector and then to smaller names and finally to the crappy ones. The inverse happens when money starts to flow: the first assets to wither are the crappy ones.
Seasonally, opportunistically or as part of your trading/investment strategies, whatever the case is, use the sector rotation in your favor.
Nature repeats itself and financial markets too. Don’t say no; go with the flow.
Chart of the Day
Sector Rotation
Sector rotation consists of an investment strategy involving the movement of money from one industry sector to another. Usually, investors are driven by higher returns, taking advantage of cyclical trends in the overall economy.
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