Sector Rotation
Sector Rotation analysis uses Rate of Change (ROC) and relative strength metrics to identify which sectors and asset classes are leading or lagging the market. This helps traders allocate capital to areas of strength and avoid areas of weakness.
Overview
Markets move in rotations—capital flows between sectors, asset classes, and geographies based on economic conditions, risk appetite, and momentum. TradeAnon tracks these rotations through systematic rate of change calculations across a broad universe.
What This Feature Provides
- ROC Rankings — Rate of change across multiple timeframes
- Sector Heatmaps — Visual representation of sector performance
- Relative Strength — Performance vs benchmark (SPY)
- Asset Class Coverage — Sectors, commodities, bonds, international
- Historical Comparison — Current momentum vs historical norms
Why It Matters
Sector rotation analysis helps:
- Identify leadership — Where money is flowing
- Avoid laggards — Sectors underperforming the market
- Time entries — Sectors beginning to outperform
- Diversify intelligently — Exposure to different momentum profiles
Rate of Change (ROC)
Rate of Change measures percentage price change over a specified period.
ROC = (Price_today - Price_N_days_ago) / Price_N_days_ago × 100
Timeframes Tracked
| Timeframe | Days | Purpose |
|---|---|---|
| 1 Week | 5 | Short-term momentum |
| 1 Month | 21 | Near-term trend |
| 3 Months | 63 | Intermediate momentum |
| 6 Months | 126 | Medium-term trend |
| 1 Year | 252 | Long-term performance |
Interpretation
- Positive ROC: Asset has appreciated over the period
- Negative ROC: Asset has declined over the period
- Magnitude matters: Larger absolute values indicate stronger moves
- Trend in ROC: Rising ROC suggests accelerating momentum
Universe Coverage
Sector ETFs
The primary sector universe tracks S&P 500 sector SPDR ETFs:
| Sector | ETF | Description |
|---|---|---|
| Technology | XLK | Information technology |
| Healthcare | XLV | Healthcare providers and pharma |
| Financials | XLF | Banks, insurance, asset managers |
| Consumer Discretionary | XLY | Retail, autos, hospitality |
| Consumer Staples | XLP | Food, beverages, household products |
| Energy | XLE | Oil, gas, energy equipment |
| Industrials | XLI | Aerospace, transportation, machinery |
| Materials | XLB | Chemicals, mining, packaging |
| Utilities | XLU | Electric utilities, water |
| Real Estate | XLRE | REITs and real estate services |
| Communication Services | XLC | Telecom, media, internet |
Broad Market
| Symbol | Description |
|---|---|
| SPY | S&P 500 (benchmark) |
| QQQ | Nasdaq 100 |
| IWM | Russell 2000 Small Cap |
| DIA | Dow Jones Industrial Average |
Commodities
| Symbol | Description |
|---|---|
| GLD | Gold |
| SLV | Silver |
| USO | Crude Oil |
| UNG | Natural Gas |
| DBA | Agriculture |
Fixed Income
| Symbol | Description |
|---|---|
| TLT | 20+ Year Treasury |
| IEF | 7-10 Year Treasury |
| HYG | High Yield Corporate |
| LQD | Investment Grade Corporate |
International
| Symbol | Description |
|---|---|
| EFA | Developed Markets ex-US |
| EEM | Emerging Markets |
| FXI | China Large Cap |
| EWJ | Japan |
How to Use This Feature
Weekly Review
- Check the heatmap for visual overview of sector performance
- Identify leaders — Top ROC across multiple timeframes
- Identify laggards — Bottom ROC across multiple timeframes
- Note divergences — Short-term vs long-term momentum differences
Sector Selection
For sector-based allocation:
- Filter for positive ROC across multiple timeframes
- Compare to SPY — Is sector outperforming the benchmark?
- Check for acceleration — Is shorter-term ROC higher than longer-term?
- Verify with price action — Is price above key moving averages?
Risk-Off/Risk-On Assessment
Market character assessment:
Risk-On Environment:
- Cyclical sectors leading (XLY, XLK, XLF)
- Small caps (IWM) outperforming large caps
- High yield (HYG) outperforming treasuries
- Emerging markets showing strength
Risk-Off Environment:
- Defensive sectors leading (XLU, XLP, XLV)
- Large caps outperforming small caps
- Treasuries (TLT) outperforming high yield
- Gold showing relative strength
Practical Examples
Example 1: Sector Leadership Change
Technology (XLK) shows:
- 1-month ROC: +8%
- 3-month ROC: +15%
- ROC vs 3 months ago: Accelerating
Energy (XLE) shows:
- 1-month ROC: -3%
- 3-month ROC: +2%
- ROC vs 3 months ago: Decelerating
Interpretation: Leadership rotating toward technology, away from energy. Consider overweighting tech, underweighting energy.
Example 2: Defensive Rotation
Utilities (XLU) and Consumer Staples (XLP) show:
- Rising to top of sector rankings
- Outperforming SPY over past month
Financials (XLF) and Industrials (XLI) show:
- Falling in rankings
- Underperforming SPY
Interpretation: Defensive rotation underway. Market may be anticipating slower growth or increased volatility.
Example 3: Commodity Cycle
Gold (GLD) and Silver (SLV) show:
- Strong positive ROC across all timeframes
- Outperforming SPY significantly
Treasury bonds (TLT) show:
- Positive ROC but less than metals
Interpretation: Precious metals leadership often accompanies inflation concerns or currency weakness.
Relative Strength vs Benchmark
Beyond absolute ROC, relative performance matters:
RS = Asset ROC - SPY ROC
Interpretation:
- Positive RS: Outperforming the market
- Negative RS: Underperforming the market
- Zero RS: Performing in line with market
A sector can have positive ROC but negative RS if the market is rising faster.
Economic Cycle Rotation
Sectors tend to rotate based on economic cycle phase:
| Phase | Leading Sectors | Lagging Sectors |
|---|---|---|
| Early Recovery | Financials, Consumer Discretionary | Utilities, Healthcare |
| Mid Cycle | Technology, Industrials | Consumer Staples |
| Late Cycle | Energy, Materials | Technology, Consumer Discretionary |
| Recession | Utilities, Healthcare, Consumer Staples | Financials, Industrials |
These patterns are historical tendencies, not guarantees.
Limitations
- Momentum can reverse — Past performance doesn't guarantee continuation
- Sector definitions evolve — Index composition changes over time
- Correlation varies — Sectors can move together in market stress
- Timing is imprecise — Rotation signals lag actual turns
- Economic cycle timing — Difficult to identify current phase in real-time
Related Concepts
Subscription Access
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|---|---|
| Free | — |
| Pro | Full access |
| Enterprise | Full access |