Stock rotation refers to the money movement that one invests in stocks from one industry to another as traders and investors anticipate the following stage of the economic cycle. If you closely examine the global economy, it generally moves in a process that is predictable.
Different industries and the organizations that dominate them either languish or thrive depending upon the cycle. This is a simple truth that gives birth to an investment strategy based on stock rotation, also known as sector rotation. Stock market experts state that investors who do not establish their whole plan on sector rotation will be wise if they anticipate this cycle to earn more returns.
Kavan Choksi – understanding how sector rotation works for stock investments
Kavan Choksi is an esteemed expert in business and finance with a keen interest in art. According to him, sector rotation originated in the form of a theory from a data analysis conducted by The National Bureau of Economic Research (NBER) that shows that economic cycles in the trading market have been more or less consistent since 1854. Thanks to a group of academic economists and government specialists in the USA, seasoned traders in the stock market know the average start, duration, and termination of every business cycle since the mid-19th century.
However, spotting cycle changes in real-time is hard to do, and so the NBER has been known to make the announcement that a global recession ended more than a year ago based on facts.
This announcement does not do much to let the stock investor know about the start and the end of a trading cycle. Fortunately, there are additional signs that can help investors determine where they should invest their money to enjoy the benefits of sector rotation.
The four stages of the market cycle
Remember, the stock markets do not move with this economic cycle; they move with the anticipation of the process or attempt to at least. The market cycle is divided into four phases, and they are market bottom, where it reaches a long-term low point; bull market, where it rallies from the bottom of the market; market top, where the bull market begins to flatten out; and the bear market, where the cycle does down again to become a precursor to the following market bottom.
Traders have to watch for telltale signs of the market
According to business and finance expert Kavan Choksi, the financial markets mostly try to anticipate the state of the global economy from about three to six months to the future. This indicates that the market cycle is generally ahead of the economic process. Investors in the share market should remember that the market would always look positively ahead, even if the economy were rooted in recession.
Traders should understand the above pattern and look out for companies that will be successful in the potential stage of the economic cycle. The telltale signs portrayed by the market have equal significance, so traders have to look out for them to make predictions for their best interests in the stock trading market.
