Sector Rotation Can Help Avoid Bear Market Downturns

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Sector Rotation Can Help Avoid Bear Market Downturns

After reading an informative article series on sector rotation it got me thinking about one of the least appreciated features of a sector rotation investment strategy - its ability to take you out of the market during significant bear markets.

Limiting the Effect of Bear Markets with Sector Rotation

After reading the article I got to thinking that sector rotation could help conectrate my stock picking into the right sectors of the economy for that period in the business cycle, but it could also provide warning signals of a market top or correction. If we simply added a few bear market or inverse sector indexes to the model, or some other alternate asset classes that survive better in bear markets, we should be able to better see when a market crash is approaching.

Expanding Sector Rotation Strategies to Industries

After studing the sector timing model a bit more I realised that there is several industries contained in any one sector of the economy. Following a sector timing model can identify the hot sectors of the economy, and then an investor can also look at what are the strongest performing industries inside that particular sector.