Bear Market, Bull Market, or Sector Rotation? KNOW THE ROTATION!

What Is Sector Rotation?

Investors are always looking for opportunities to boost returns and reduce risk in their portfolios. One way to do this is by understanding and utilizing sector rotation.
In simple terms, sector rotation is the process of moving money from one sector to another. In order to take advantage of positive market trends investors will want to pay close attention to these rotations. In general, there are two types of market conditions that investors need to be aware of: bull markets and bear markets.
Sector rotation is a strategy that investors use to take advantage of these market conditions. The idea is to rotate your investments into sectors that are doing well in the current market conditions and away from sectors that are not.
For example, in a historical bull market, you would want to be invested in sectors such as technology and healthcare. In a bear market, you would want to be invested in sectors such as utilities and consumer staples.
Sector rotation can be a helpful tool for investors to boost returns and reduce risk. However, it’s important to understand how it works before implementing it in your own portfolio. Keep reading to learn more about sector rotation and some current YTD chart examples of what it looks like.


Lets start with a philosophical question in regards to the market; is there really such thing as a bull and bear market? One could argue that there is not, and the market is in fact a cycle of sector rotations. Liquidity going out one, to another, again and again. Take for example the 4 tickers of the main post image MSFT , TSLA , GOOGL , AAPL - these are considered Tech Stocks (yes TSLA is a tech stock!). YTD performance of all these stocks are in the red. Please take the time and study their trends. To the novice that had a portfolio made up of 80% tech, they would look at this chart and scream BEAR MARKET. But is it? It is impossible for the average trader to tell, but not all that money was "lost" in a bear market. It simply was rotated to defensive sectors. Sure, some money was taken out of the overall system I am sure but logic dictates that the majority of the money just found a new home. Investors in tech in these cases could ride the storm and average down (dollar cost averaging), write call options, or purchase puts (along with many other strats) - aka play a bear market in THAT sector. The terms "bull" and "bear" market are used to describe market conditions where prices are either rising or falling. Some people believe that there is a fundamental difference between the two types of markets, while others believe that they are simply two sides of the same coin. Ultimately, there is no right or wrong answer, and it is up to each individual to decide what they believe.

So where did the Tech money rotate to? For those of you that need only bull markets to trade, find the rotation and follow it. Never marry a stock or sector - money moves fast and is prone to jumping ship when major events happen. Here are 3 charts that show areas that bulls have had success:

EX1: Staples and Consumer; HSY , MCD , OLLI , WMT

EX2: Energy, Industrial, Insurance; KMI , CAT , OXY , ABBV

EX3: Defensive and Insurance; HON , RTX , AFL , CI


If you take the time and study the charts above you will see that not all is bearish when you know where to look. Looking at these rotations can start to paint a larger picture when studying ETFs or the overall market in a national/global economy. Especially when it comes to finding a fair value area in the middle of a downed market. Recovery off of a bear market should be equitable across multiple sectors. In the current case (today) we see that the rotation into "defensive" stocks (all the stocks mention in EX1, EX2, and EX3). As there is a small pinch of hope that inflation could be slowing, the moves have been liquidity into these defensive sectors - not a sign of a healthy recovery (yet) in my opinion. Right now we are seeing more institutional interest in companies like HSY, MRK, CI, HON and less interest in Energy. Energy is a great sector to look at currently to start to see that shift. We can look at commodities like GOLD and see the increased attention and bullish run it has had recently. Remember, intuitions want to create the largest positions they can , but over time so as not to raise a flag to others.

To find sector rotation:

1) Familiarize yourself with the S&P sector funds like the XLF , XLP , XLE , XLU , etc

START LARGE - look at the Monthly, Weekly, and Daily

2) Scan for stocks with rapid price drops and identify sectors that may be hurting

3) Scan for stocks with rapid rising price WITH higher than average volume (preferable increasing volume as well)

4) Visualize the sectors in a heatmap. Size by Volume (Monthly) and Color by Performance (Monthly). Since this is constantly changing, I suggest taking a screen shot of this map every week - this will be the best way to "see" the money rotate.

5) When going through 2-4 consider comparing small and large cap companies as well - as this too can hold its own rotation.

6) Stay on top of news, read read read read. Understand the world around you and rely on change.

7) Utilize Smart Money Concepts. Please visit LUX ALGO's page for this, as he has made a beautiful indicator and strategy based around SMI and institutional order blocks.

8) Conduct an RSI or Stochastic RSI study to identify divergences in OVERBOUGHT or OVERSOLD conditions.

9) VIX VIX VIX - yes we are talking sector rotation and the VIX is an "overall" reflection of the market in whole but looking at areas of the VIX (ie 20 and 45) can give signs of upcoming rotation. Although it may not point where, it may describe when these rotations can occur.


If you like this post and would like a more detailed follow up, please comment below so I can see your interest. This is a very extensive topic in which it may take several posts to fully write out in detail. This is post 1 and meant to be an introduction, as I know that almost every line below can be heavily expanded upon.


Happy trading everyone!