A Simpler Way to Rotate Across Sectors

Can market history improve sector selection?

Sector rotation is one of the oldest ideas in investing. The challenge is figuring out which sectors are likely to lead next.

Some approaches rely on business-cycle forecasts: Overweight cyclicals during expansions and defensives during recessions. The problem is that economic regimes are often only obvious in hindsight, and macro indicators tend to lag. By the time investors recognize the regime, much of the market move has already taken place.

Rather than trying to forecast the economy, a different approach is to ask a simpler historical question:

When the market looked like this in the past, what did each sector do next?

No macro forecast or recession call is required.

In this article, I discuss research built around that idea, test it on sector ETFs, and assess whether it adds anything beyond simply holding SPY or an equal-weighted sector portfolio.