The movement of investment capital from one market sector to another as the economic cycle evolves — following strength into leading sectors and exiting lagging ones.
Deeper Explanation
Different economic environments favour different sectors. Early cycle: financials and consumer discretionary tend to lead. Mid cycle: technology and industrials. Late cycle: energy and materials. Defensive cycle: utilities, healthcare, consumer staples. Sector rotation reflects changing earnings expectations, interest rate sensitivity, and economic sensitivity. Momentum investors do not try to predict when rotation will occur; they follow it. The tool: relative strength analysis at the sector level. When financials start outperforming on a relative basis, rotate toward them; when they start underperforming, rotate away. Following sector momentum avoids the error of holding strong individual stocks in the wrong sector at the wrong time.
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