Hello all, welcome back!
Given the impact sector rotation has on the outcome of investing, I will post a number of charts here detailing how the various sectors either had outperformed or underperformed the S&P500 over the last 13 years. From the charts, you will see how funds rotate during shorter phases of bull and bear market runs. Please bear in mind the charts here are shorter-term in focus (weeks and months) compared to the sector analysis done in earlier postings which generally delved into sector returns over medium to longer term. Shorter-term cycles are much more influenced by speculative moves in anticipation of and response to many factors such as government decisions on bail-out, intererest rate changes, bond purchases, wars, crisis, demand and supply of oil and commodities, strength of economies and even scandals rocking the markets. Often these serve as catalysts for an overbought sector to correct or for an oversold sector to rise, as evidenced in the following charts.
For the last decade or so, a significant part of the bull run was driven by asset inflationary pressures due to low rates for an extended period of time. There was expectation that countries like China would continue its unabated growth and hence, the demand for commodities and oil would continue to rise. There was a buoyant mood leading to Beijing Olympics 2008 despite soaring oil and and commodity prices exerting strains on global economic growth.
In the following charts, note how similar sectors rise and fall (relative to S&P500) during bull and bear market runs over past decade.
In summary, if you are a shorter-term investor or trader, it pays for you to understand the strongly trending sectors in a bullish market and the defensive sector positions you can take during a bearish market. Understanding sector rotation will keep you on the right side of the market and help reduce risks while improving profitability.
