Trading the Rotation

So it seems that a large swath of traders are now coming around to the idea that the market may just correct through rotation instead of a pullback. A correction through time if you will. If you are one of them what do you do about it? Look for what is rotating. Typically you would look for underperforming stocks and sectors and buy them while selling those sectors or stocks that have outperformed. The performance chart below is a good place to start. It shows the performance of 4 sector ETFs, Energy ($XLE) Financials ($XLF), Industrials ($XLI) and Consumer Staples ($XLP), plotted against a constant S&P 500 ($SPY). What does it show? Consumer Staples have outperformed and are now giving back that

perf

excess as the Financials which have under performed are soaring higher. In the second pair, the outperforming Industrials have not yet started to revert towards the S&P 500 but have stopped adding to their outperformance, as the underperforming Energy sector has stopped losing ground. This is the place to look for the next opportunities in the rotation. From Industrials into Energy.

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