Sector Rotation

Sector rotation strategies are based on the theory that certain sectors of the economy perform better during different stages of the business cycle. For example, during periods of recession, Health Care, Utilities, and Consumer Staples tend to perform better than other sectors because they are things people continue to buy regardless of the condition of the economy. Similarly, the Financial sector tends to do well just after a recession because businesses begin to borrow again to prepare for a recovering economy. Our rotation model starts with a group of about 40-45 different sectors and countries. Then, at the end of each month, we screen this list according to several criteria, and those that pass the screen are then ranked. Based on their ranking, the three best sectors are bought and held for one month until this procedure is repeated again from scratch. Occasionally there are no sectors that pass the screening process, and in that circumstance the strategy reverts to cash and other defensive investments. This system tends to move into sectors in the early stage of an uptrend and tends to avoid those that are overheated or in a downtrend.

Funds Used:

Emerging Markets (EEM), Developed International (EFA), Australia (EWA), Canada (EWC), Hong Kong (EWH), Japan (EWJ), Singapore (EWS), United Kingdom (EWU), Mexico (EWW), India (IFN), Brazil (EWZ), China (FXI), Biotech (FBT), Natural Gas (FCG), Internet (FDN), Technology (XLK), Financials (XLF), Materials (XLB), Small Cap (IWM), Gold Miners (GDX), Treasuries (IEF), Networking (IGN), Software (IGV), Defense & Aerospace (ITA), Real Estate (IYR), Transports (IYT), Telecom (IYZ), High Yield Bonds (JNK), Insurance (KIE), Banking (KRE), Media (PBS), Leisure (PEJ), Pharmaceuticals (PJP), Semiconductors (SMH), Construction (XHB), Energy (XLE), Industrials (XLI), Consumer Staples (XLP), Utilities (XLU), Health Care (XLV), Consumer Discretionary (XLY), Retail (XRT), Inverse S&P (SH).