This is evident because the ex-post risk premium on consumer staple goods is higher relative to that of the consumer discretionary goods. There are periods during which one sector outperforms the other. On the other hand, non-cyclical equities are issued by companies that sell basics that we keep on using even during economic downturns. Want to determine the current cycle stages? Finally, past performance isn’t always indicative of future results. Despite operating in different industries, these industrials sector companies all benefit from lower oil prices, causing share prices to move higher when fuel costs decline.

Zacks Research Is Reported On:

Annualized returns are represented by the performance of the top 3,000 U.S. stocks measured by market capitalization, and sectors are defined by the Global Industry Classification Standard (GICS). Stock sector rotation strategies offer you a powerful way to navigate market cycles and optimize your investment returns. Sector rotation represents the systematic movement of investments between different market sectors based on economic cycles. These numbers are evidence that a significant portion of the portfolio’s outperformance would have resulted not from its higher risk, but from selecting the most favorable sectors for each phase of the business cycle. This paper has shown that when using Morningstar’s methodology for determining value and growth, style-based portfolios tend to consistently overweight or underweight certain sectors relative to a broad market index.

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While late-cycle sectors, on average (i.e., throughout the cycle) appear to have the most exposure to value, it is interesting to note that their value-like behavior is heightened during the late phase of the cycle, which is exactly when our hypothetical portfolio would be rotating toward these sectors. Finally, on Figure 3 it is worth noting the behavior of late cycle sectors during the late stages of the business cycle. Figure 3 also plots the trailing 36-month HML coefficient of early cycle sectors, late cycle sectors, and defensive sectors. Figure 3 plots the trailing 36-month HML coefficient of the sector rotation portfolio from 1990 to 2020.

Direction Two: Cyclical Sectors (energy, Industrials, Materials)

Late cyclical sectors have historically performed their best during late expansionary periods. This paper showed that since 1972, early cyclicals like technology and consumer discretionary have performed best during the early and mid-expansion periods of the business cycle. At the time of this writing, transaction costs at nearly every major U.S. stock brokerage and/or custodian have fallen to negligible levels and can be safely disregarded when considering the application of this strategy going forward. These performance numbers include the reinvestment of dividends but do not consider the impact of expense ratios, transaction costs, and taxes. The active portfolio would have outperformed on a risk-adjusted basis as well. Large Cap sectors at any point in time would be considered irresponsible due to a lack of diversification.

Simple Sector Rotation Strategy!

This means that the style characteristics of a given fund are estimated based solely on the fund’s performance over a given time frame through the use of regression analysis, with no regard for the fundamentals of the underlying stocks. As an alternative to using the Morningstar style methodology, we can demonstrate that sectors have style biases by applying the Fama-French Three-Factor Model to the eleven sectors of the S&P 500 index, using a dataset of monthly returns from 1990 to 2020. This approach seems to confirm the value and growth characteristics of individual GICS sectors, with technology, communication services, and consumer discretionary stocks being significantly tilted to growth, and financial, energy, staples, and utilities stocks being significantly tilted toward value.

The relative strength portfolios outperform the buy and hold benchmark in approximately 70% of all years and returns are persistent across time. However, a rigorous backtest is needed to determine return/risk characteristics and correlation to equity market risk … The findings were clear, over the sample periods that these ETFs were traded, an investor would have been able to exploit country and industry momentum strategies with an economically significant excess return.

Main Management’s Aggressive strategy is a variation of the Main Management All Asset strategy. Viewers of Trade With the Pros programs should consult with their financial advisors, attorneys, accountants or other qualified professionals prior to making any investment decision. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. Customers of TWP programs should consult with their financial advisors, attorneys, accountants or other qualified professionals prior to making any investment decision. However, any customer will be responsible for considering such information carefully and evaluating how it might relate to that viewer’s own decision to buy, sell or hold any investment. TWP provides information that its customers may use to make their own investment decisions.

The "ai Capex" Fatigue

They concluded that there is the potential for such strategies to outperform the broad market—even rebalancing the portfolio as infrequently as twice per year. The relative performance is calculated by taking the difference between the sector’s return and the overall return for the S&P 500 Index excluding the sector. At the expense of excluding other factors that affect the business cycle, this relatively simplistic definition allows us to objectively and quantitatively mark the turns in the cycle. Both have extensive histories dating back to the late 1950s, covering several business cycles. In fact, the energy sector’s highest 36-month HML coefficient of 2.12 is considerably higher than that of the financial sector (1.36).

Market Factors

We hope Everestex exchange review this article helps you better understand and apply the Long Call strategy, allowing you to identify directions clearly, manage risks effectively, and seize the opportunities presented by sector rotations in 2026. In an environment of rapid sector rotation, maintaining composure, adhering to discipline, and focusing on fundamentals often yield more stable long-term returns than frequently chasing market trends or cutting losses prematurely. This year, the U.S. stock market no longer appears to be experiencing a broad-based rally but has instead entered a phase requiring more refined selection of industries and stocks.

• The ex-post risk premium on equity sectors is the difference between the average return on a sector and the short-term nominal risk-free rate.
• During a bear market it is expected that all stocks will go down some.
• The addition of a trend-following parameter to dynamically hedge the portfolio decreases both volatility and drawdown.
• The strategy described here is based on Faber’s white paper findings.

The early expansion phase favors materials sectors at key inflection points when manufacturing activity increases. These indicators create actionable signals for portfolio adjustments, enabling strategic position changes aligned with economic conditions. Whether the economy’s expanding contracting or transitioning each phase creates opportunities in specific sectors. Sector rotation strategies offer a dynamic approach to portfolio management that can help you capitalize on different economic phases. Its advantages lie in controllable risk (maximum loss is limited to the premium paid), substantial leverage effects, making it especially suitable for situations where market direction is clear but timing remains uncertain.

The economy goes through cycles, and sector rotations occur at each stage. Growth stocks, which are more sensitive to interest rates and other economic factors, took advantage of favorable conditions across the decade and drastically outperformed value. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results. A relative strength model is tested on the French-Fama US equity sector data back to the 1920s that results in increased absolute returns with equity-like risk. Pick 3 ETFs with the strongest 12-month momentum into your portfolio and weight them equally. However, the implementation of such strategies is costly due to a large number of stocks involved, and some studies show that momentum profits do not survive transaction costs.

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• It has had the highest volatility relative to all sectors over the past 20 years, which could boost portfolio performance.
• Recent stocks from this report have soared up to +97.3% within 30 days – this month’s picks could be even better.
• Energy sectors fell to a Very Unattractive rating from Attractive.
• With the 10-year Treasury yield hovering around 4.22% (the highest level since mid-2025), Growth stocks are under structural pressure.Growth stocks are "long-duration" assets; their valuations rely on profits far in the future.
• Before investing have your client consider the funds’, variable investment products’, exchange-traded products’, or 529 Plans’ investment objectives, risks, charges, and expenses.