Why sectors do not move together
Each sector earns its money differently, so the same condition can affect them differently. A change in interest rates may affect banks one way and property developers whose buyers pay in instalments another. A currency move may help an exporter paid in dollars and squeeze a company that imports its raw materials. That is "may," not a fixed rule, because every company inside a sector has its own circumstances.
Compare the sector with a reference index
The question is not "did the sector rise?" but "did it rise more or less than a suitable reference?" The reference is usually a broad market index. If the index rose 6% and the sector 8%, the sector is above it by only 2 points. That comparison is the sector's relative performance against the index: it tells you whether the sector is above or below the reference, nothing more. Someone using this strategy tracks it over a period such as 3 or 6 months.
A worked example
Where is the difficulty?
Saying "this sector does well at this stage of the economic cycle" is easy after the move. At the time you are unsure which stage you are in, and the market often prices a change early, before it shows in the figures. And in a sector with only a few companies, one or two of them can move the whole sector.
Compare the sectors
Open the sectors page and compare each sector's performance with a reference index over the same period, not the percentage on its own.
Check yourself
1. The reference index rose 6% and a sector 8%. By how much is the sector above it?
2. What is the hardest part of sector rotation?
Summary
- Sectors react differently to interest rates, currency and the cycle, but no rule fixes every company.
- Compare a sector with a suitable reference index over the same period, not by its percentage alone.
- Timing is the hardest part, and a written rule protects you from arriving at the end of a move.