You may have heard the term "sector rotation." But what is it and how can it help you invest?
Sector rotation is the normal motion of stock-market sectors rising or falling in performance. These shifts — which can take weeks to develop — are key to identifying emerging leadership. Sector rotation also tells investors what parts of the market are weakening.
According to IBD founder William O'Neil's research, 37% of a stock's price performance is tied to the industry group that it's in and an additional 12% from the industry sector's performance. There are 11 S&P 500 sectors, and IBD breaks them down further into 33 sectors. Within the sectors, IBD further breaks down the market by 197 industry groups.
A sector that is hot now may fall out of favor, allowing another to take its place. This can happen when investors decide to take profits and look for better places to put their money.
Which sectors take the lead depends on factors such as changes in industry trends, innovation, technologies, financial markets and even the political backdrop.
Larger themes such as the price of commodities, interest rates and the economy can all come into play in how a sector performs. Also, the current market may prefer large-cap or small-cap stocks.
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How To Spot Sector Rotation
Here are some ways to spot sector rotation and how best to jump on it.
To start, go to IBD Data Tables. Here you will find IBD Smart NYSE + Nasdaq Tables, which classify the 33 IBD sectors by performance.
Click on a sector to view the list of stocks in it. If a stock is strong enough to be an IBD Sector Leader, it will be displayed at the top of the sector listings. The Smart Tables show how each sector has performed each day and year-to-date. Pay close attention to sectors moving into the top six. Historically, that's where most leading stocks are found.
Next, look for IBD Industry Group Rankings. This data is more valuable because it shows the ranking of all 197 IBD industry groups, plus their spots three and six weeks ago.
In IBD MarketSurge, the Related Information panel on the right side gives more detail on a stock's sector and group, including how a stock ranks vs. others in the group.
MarketSurge also lets you do a scan on industry groups from the bottom left panel under "197 Industry Groups." This sortable list gives current industry ranking, as well as rankings from three and six months ago, which is another way to measure rotation.
The New High List identifies stocks by sector that hit new highs the prior day and provides their IBD EPS Rating. Study the sectors with most new highs and most new lows for clues on rotation.
Sector Charts, ETFs
Checking the S&P 500 sector ETFs gives insight into leaders and laggards. For this, check the Stock Market Data page of Investors.com. It includes charts of the major indexes and the 11 S&P sector funds for a visual assessment of sector performance.
The list of IBD Top Sector ETFs also keeps you in tune with top-performing sectors.
And read The Big Picture each day for analysis on sectors and the broad market.
Use these tools to help you spot sector rotation and new leaders. You will be a step ahead of the crowd.
Follow Kimberley Koenig for more stock market news on X, the platform formerly known as Twitter, @IBD_KKoenig.
