Sector Rotation is a phenomenon that occurs during healthy bull markets where investors shift money out of better performing industry groups and into underperforming groups in an attempt to find what is still "cheap." They will ride the wave until it dies down and then actively seek out the next big wave. The net effect of this rotation will often cause long-lasting appreciation in the broad market indices as each sector takes its turn carrying the torch. No one sector is responsible for all of the gains; therefore, we experience a robust and healthy bull market.

These moves are typically created by large institutional money that has the power to affect prices in a meaningful way. For the individual investor, attempting to time the market this way is usually more trouble than it's worth. Abandoning your long-term plan to try and find 'the next hot thing' almost always leads to poorer performance rather than better. However, making incremental tactical shifts in your asset allocation can add value as long as they don't undermine your long-term focus.

Let's take a look at YTD performance of the various sectors to see if we can identify where opportunity might arise in the next rotation.


The first thing you will notice is that Utilities have had the worst performance relative to the S&P500. Going a step beyond that, what we have seen is interest rate sensitive stocks - that is to say stocks with larger dividends (like utility companies) - have been underperforming for a number of months now. These stocks were affected when interest rates began to rise and sold off along with the bond market. The short-term rationalization for this is the fear that the Fed will taper its bond buying program and rates will continue to rise for the foreseeable future.

One might view this as an opportunity to "rotate" a portion (or increase current weighting) of their investments into dividend stocks. You could make the case that with baby boomers retiring en masse and interest rates still historically low, retirees will need income to maintain their lifestyles and will have an increasing need to own stocks with strong dividends. If this is true, you might decide that the recent underperformance in dividend stocks is an opportunity to rotate into an asset that could outperform in the long-term.

Whether or not this is the right move for you I cannot say in this post. This is just an example of how you might be contrarian and seek out undervalued investments (rather than chasing hot investments) in an attempt to augment your long-term strategy.

Chart Source:

Sam DiNorma

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).