Research on Out of Favor Sectors in Stock Market?

M

marshg

Hi:
I'm interested in asset allocation [not trading], and was wondering if anyone knew of any research done on out of favor sectors in the stock market; i.e. is there some time frame--say, 3, 5, or 7 years--that if a sector [ex. utilities, telecommunications, home builders, etc.] is underperforming that then that sector is likely to then overperform in subsequent years [not necessarily for as long as it was down]--but I'm wondering if any studies have documented some sort of mean reversion of returns in sectors. I've been trying to find out something about this on the web, but with no luck; so if you have any leads for me, I'd appreciate it.
thanks!
Marshall
 
Sector analysis is a rich field and resource.


Unfortunately, I do not look at it in the area of interest that you have stated.

There are two areas that can be very profitable:

the first is the opposite of the reversion stuff. That is, sector rotation. If you watch some of the standard sources you can see how the reporting shows sectors coming into prominence and sectors going out of favor.

Considering that within sectors there are leaders and laggers there is another advantage.

P/E ratios can be used as part of this analysis.

The second area is a killer area for the reason that profits can be hyper for the first few cycles, well over twice the usual potential.

This is the phase change phenomena. The deal is to use an anticipatory indicator of phase change. The better indicators for this are "unusual" applications of existing work.

Most money making is a routine where the potential is an established thing. Both of these techniques come ino play as subordinate to the blunt force and high velocity trading.

A trader may reach capacity on his streams of capital running in position trading. At that time he can periodically go to sector rotation for his "big" money. Count on 2 to 4% a week with a 4 t 5 week trading cycle.

Sometimes a trader can wish to bear down for a couple of seasons (do not think Summer); here he can focus on the first several swings of a stock going through a phase change. what this means is that the daily take on a hold is often in the lowest of two digits. This is a kind of trading that is majorly influenced with odd harmonics and, therefore take a heavy hand to act in a timely manner.

Et sort of focuses on "trading" so as you say the sector business is kind of out of the ball park for most. If ET were more oriented to makig money and the strategies for a comprehensive view of a career (meaning doing it as an amateur over a long period of time to get rich), then this topic could replace several of the forums now part of ET.

At some point in time there may be enough people overlapping the HF kind of money andd yet they do not feel the traps that limit performance of hedge funds need to be placed upon them.

It would be like having Stevie money and no limitations like Stevie created for himself. You might need a few college students part time but you could do sector rotation like running the table in billiards (once a year). You would be doing 20 of 240 sectors and running 2 to three streams in each of the 20 sectors to handle 600 million.

No one has picked up on this in the either the trade nor the academic journals. As you suggest they are looking at reversion instead. Right now Fuqua, Sloan and Wharton are smelling something but it is tough to depart from the party line.
 
thanks Jack. Yes, I should have noted that I was aware of the upside to sectors moving [though I certainly wasn't aware to the degree you wrote about], but given my time limitations, I'm looking for something which can work in "slow motion." May be a dead end, but again if someone knows about it, I'm quite interested.
 
Great stuff, Jack. Thanks.
I am also looking into a sector rotation strategy. As a broker I used to do it with portfolios in a very elementary way, through baskets of stocks or mutual funds. Now that I am testing more strategies, I want test this as well. I also would love to hear more on this. I thought about ETF's as a vehicle, but not enough history to test. I guess it will take a lot more work?
I was thinking that you can also isolate from a top down approach, say LargeCap Value, SmallCap Growth, etc., then break it down from there. Those areas have clearly shown signs of rotation.
What are your thoughts?
Marsh, I will check with an old fund company I used to work with who had some sector rotation strategies. I'll see what they have as far as research.
 
Quote from marshg:

wondering if anyone knew of any research done on out of favor sectors in the stock market; i.e. is there some time frame--say, 3, 5, or 7 years--that if a sector [ex. utilities, telecommunications, home builders, etc.] is underperforming that then that sector is likely to then overperform in subsequent years
More...

A long term trend following position trader might select stocks from a list that includes utilities, telecommunications, or home builders. If price increases and a buy signal appears then the trader buys.

You are not interested in trading but you are interested in mean reversion? It does not make sense to me.

Maybe searching for value investing might help; "out of favor" sectors might represent value to somebody.

There is a subject called "rebalancing" that might be worth studying. http://www.castrader.com/2006/10/the_shannon_met.html
 
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