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Why Having a Sector Rotation Strategy is so Important - Australian Investment Education

The buzzword of ‘sector rotation’ has one mentioned by investors across markets. As we start to see the end of the Coronavirus pandemic. With biotechnology companies announcing new vaccines, our road to economic recovery looks much clearer, and thus our fundamental view on sectors ever-changing. Here’s why sector rotation is so important and how you can profit from these kinds of big stories:

What is sector rotation?

Unless you live under a rock you’ve probably seen or heard every news broadcast, radio or article talk about the buzzword of sector rotation right now. Out of one, into another.

Sector rotation, says host Andrew Baxter, is something quite tricky to understand however something that is critically important. So, what is sector rotation? Well, if you imagine a big cake that has been cut into slices. Each slice represents a sector that you are invested in with the cake acting as your entire portfolio. Some examples might be the banking sector, the tech sector, or the healthcare sector.  With each sector having relevant stocks that operate within those particular industries.

Taking a look at the tech sector for example more specifically – this year we have seen technology stocks (ie. those listed on the NASDAQ) run up to the races amidst their ability to capitalise on people staying at home. Stocks like Zoom and Amazon are two that have particularly been performing over the last 6 months, just to name a few. Rotating into the tech sector is something many investors have been incredibly profitable from, simply by understanding the key points below.

Why is sector rotation so important?

Sector rotation is critically important for any active investor who is looking to be profitable and capitalise on market trends. Think about riding a bike. For example – it’s much easier to ride with a tailwind behind you than it is into a headwind. Investing in sectors is much the same. Host Andrew Baxter says rolling with the money flow in the market is an easy way to make money. As here you don’t have to be a great stock picker, rather someone who understands what sectors are performing and which ones aren’t.

This really comes down to understanding the news flow and being across your fundamental analysis. A good example is a more recent one when biotechnology company, Pfizer (PFE: NYSE). Announced a 90% effective COVID-19 vaccine for clinical use. With this, markets rotated out of your ‘stay at home’ tech stocks into more economically sensitive stocks. Including those in the banking sector and travel sector as our economic road. To recovery becomes much more likely and certainly much quicker.

How do you choose the right sectors?

Dusting off one of the old-school tricks from host Andrew Baxter’s playbook is a tool known as On Balance Volume (OBV). This is a technical indicator designed to indicate whether or not a stock has been experiencing buying pressure or selling pressure. Which quite simply can be used to identify upwards trends in the market over a given period of time.

Couple this with some fundamental analysis and brief economic study – BOOM! You’ve got your sector rotation strategy. From here, you can begin to invest in specific sector Exchange Traded Funds (ETF’s) for a more diversified approach. Or instead, look for better performing individual stocks within your chosen sector. This is something Andrew teaches through Australian Investment Education.

How do you get started in sector rotation?

Rotating from one sector to another based on market money flow may seem simple on the surface, however, when you really get down to the nuts and bolts of it this is one of the most crucially important areas of any investor’s trading plan. Typically, you’ll find the beauty of one sector is also its poison chalice when taking into account the endless amounts of fundamental and economic information available to investors. Sifting through this information effectively so that you can pick the best performing sectors to capitalise on this market is something you too can learn through Australian Investment Education.

 

 

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