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Sector rotation

Hey Market Pilots,

Sector rotation. What exactly is it? The words seem simple enough to deduce what it means, but let’s take a deeper dive since we are right in the middle of one.

As you may already know, the market is made up of different sectors. There are the semis, healthcare, REITs, materials, home builder, tech, small caps, big caps, retail just to name a few. There are a bunch of different sectors and some of the stocks find themselves in more than one sector. 

As money moves around the market, it tends to do so in groups or sectors. Sometimes semiconductors will be hot and moving up well. Other times, it may be retail. Different forces cause the migration of money into these various sectors for all sorts of reasons. When the Coronavirus hit and the market finally bottomed, the first stocks to take off and make the most gains were some tech and online-based stocks. These were also big leaders with household names that had people piling in due to robustness despite a closed economy.

Since that time, these names have reached unexpectedly high levels. These levels have provided great gains for major funds and the market as a whole, but they can’t do it forever. Funds and investors see that the amount of reward left in these names is minimal, so they start to look for new opportunities while taking their profits out of these big winners. 

First, by taking profits and exiting positions, this slows the high flyers and they begin to lose speed, making it more difficult to make solid gains in them. Investors need to put these profits and cash somewhere and so they look for tickers that have room for growth. In this current environment, this means finding beat-up stocks that have traded flat long enough to finally turn resistance into support. This also means that these names have reason to come back to life as the economy opens up and a vaccine is on the horizon.

So what are these names and sectors? Well, think about what will benefit from people going out and about again and if people are willing to socialize with the protection of a vaccine. Airlines, Cruise lines, casinos, and entertainment places. Start looking around at names that have been hibernating for the last few months and look like they are starting to come alive. Find the best of these names and then apply your strategy to them. You can still hang onto the past winners which did well but realize they may slow, and there are more lucrative opportunities out there.

Over and Out, 

Your Profit Pilot

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