Sector Rotation

Except for those with professional training as skeptics, it seems perfectly intuitive that there would be "rotation" between the various market sector. That is, the relative performance would somehow roll from one sector to another with some smoothness and persistence.

For a concrete example consider just two related sectors: Consumer Discretionary and Consumer Staples. Wouldn't you expect that one of these might out-perform the other for a period of several months or even a year, then the other would take over and out-perform for at least a few months?

Naturally, this is at odds with the EMH, but it has advocates even within the distinguished NBER.

Here is a piece of poetry from a rotation fan:

"Mature cyclicals (chemicals and paper, for example) are the crocuses, and general industry and banks are the daffodils (they flower only once there is clear evidence of an upturn). Next come the “late summer flowers” of the pharmaceuticals and finally the “roses that last right up to Christmas”, the tobacco utilities and food producers, which rise even as the economy cools."

Isn't that charming? You'll need to visit MoneyWeek for the rest of the story.

Incidentally, it's the consumer staples that have been doing best of late ---

The InvestorPedia article on sector rotation is a generally useful place to begin if you want to explore rotation-type ideas for your final project. It's not particularly thoughtful, but its a start.

James Montier's blog has a piece that is quite anti-sector rotation. You many want to look at it to understand the possible headwinds.

I like Montier book Behavioural Finance --- it gives a useful survey of a large literature, but I think he oversteps his evidence in his blog piece on sectors.

He's really making long-term a priori argument, where all I am asking for is a little smoothness of relative returns.

StockCharts has a nice page on Sector Rotation with nice graphics an links (some are best skipped if you are Java impared).

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