Quote from agrau:
I would believe that the movement of components ultimately move the sector. You suggest that first the sector moves (relative to other sectors), and then the components. Or is there something I misunderstood?
This is a rich and deep topic. One of the things that I have done most of my life is model opportunities in various markets, business sectors, governments and nations. Conversely, I have worked on institutionalizing the solutions to societal and community problems.
If there ever were a place where traditional analysis (FA) meets Technical Analysis, sector analysis would be that place. The quants are not really viable in all of this it turns out; they are driven by trying to perfect the application of their knowledge rather than "making money" which is the underlying force of the financial industry.
Fundamental analysis prevails as the basis for sector analysis. As we all know it largely leaves out the price aspect of securities. Long ago, the NYSE, promulgated "Seven Keys to Value", all FA indicators and measures. I added 10 others to round out 17 facets of traditional analysis. Using these produced a persistent measure of future price appreciation.
That approach in those days tended to obliterate the fundamental utilization of asset allocation, so popular until a few years ago. Asset allocation is based upon client pain as the basis of reallocation (especially "when" it happens).
Now, we have set to scene for what goes on in the equities market. Sector movement as a basis for adjusting application of capital could have been just as powerful as asset allocation (instead of the presumably independent asset classification divisions that persumably go in and out of favor.)
Sectors move relative to each other, initially, on the basis of FA stuff. Analysts work this turf horribly and "popularize" what is hot and what is not. The "herd" moves in response to this analysis theme. FA drives inital sector moves.
Later, enter price movement based on constant supply (This shoots in the a$$ all supply/demand BS) and VARIABLE demand. Demand is created as a consequence of FA analysts efforts and their "white" papers being delivered to big money firms from their institutional investment advisory firms. One of my past "consulting" activities was designing scope and bounds of "white papers, do executive interviews in situ, critiquing production team results, and providing expert support for presentations of such firms. As white papers compete for selection and use by big money, then as buys are made for large portfolios, and then "demand" for "constant supply" going up, the given sector begins to move. Gradually the retail market becomes informed as brokers and financial advisors "hear" the street and pass stuff on to clients.
Traders who do rate of change and acceleration of sectors see all of this before price moves. FA values move first, volume increases as it follows FA value increasing. Price, then, moves according to the P, V relation.
Traders focus on money velocity, so they fit into the sequence during the fastest increases in money velocity ("just in time"so to speak). Increasing money velocity is "acceleration". This is where "xover" trading comes from.
I was intercepted by the institutional investing grapevine by serendipity. Kemeny (inventor of BASIC and head of Dartmouth College, subsequently) advocated that executives of large corps get realigned mathematically vis a vis decision making. I was enrolled to do this for Greenwich residents whose corp headquarters were in nearby NYC. Naturally, making money with earned wealth became part of this. Most of them had not experienced the money velocities possible nor that market timing was the key to making money. We all enjoyed the experience and after a while I left to live in Switzerland (See Darvas travels at that time as a parallel example).
In your other explanation on your method you mention volume, rate-of-change and velocity changes as values to keep an eye on. Do you have any experience/opinion on using relative strength between either components or component vs. sector index? The reason I am asking is that point&figure based sector rotation, as taught by Chartcraft or Dorsey, Wright, apply relative strength to find leaders and laggards. Any thoughts on this?
All of these things are well connected. Some Wizards are inventors of tools that deal with detecting stuff in this arena. This is another example of the transition from FA to TA in the continuing process of detecting opportunity. Welles Wilder is one of my favs. It is rare that volume and price are combined in any indicators. Those that do, have the advantages of using volume as a leading indicator of price.
Using WJO an an example (for IT type investing), you see EPS is the major FA indicator. It's partner RS, is the price assessment tool. The combination is strident for scanning to have universes that are risk free.
Money and risk management do take a back seat at some point when the money velocitiy has been largely optimized. By operating with supreme universes, you are far far away from the hauinting voices of risk and money management hawkers who largely deal with CYA repairs caused by huge voids in knowledge, and skills largely precipitated by incomplete and irrational approaches.
Those you mention are refiners of foundational precepts. Relative Strength absolutely eliminates those potential investments that cannot compete in the dynamic of making money. Obviously increasing RS is where the real payoffs occur.
What you are focussed upon is commendable and very rational. I support threads here in ET where the participants are really accessing knowledge on their own.
The goal you will attain as time passes is to have a continuing selection of money making stocks (3 beta or better). You will be using leading indicators of price that allow you to continually optimize your performance. At some point you will be making capital instantly available (by exiting a high money velocity stock) to enter each opportunity that represents an improved short term use of the capital you extract.
What is so heartening about all of this, is that it is not difficult. What is particularly refreshing as well is that there really is no competition or rivalry at this level of play. There is only one limit that I have found so far. For any stream of capital, it really is not possible to do more than 10% of the trading in that equity on a given day. It is absolutely true that your best days will be a direct and precise result of being in the right sector at the right time. Over time, I have found that it is a good idea for an accomplished trader to have a few sectors that are known down cold. If you get to the quantity limit in an equity of a sector you know down cold, you will have the experience of pulling money out of the market at a daily rate equivalent to 1/10th to 1/20th of the total income of some of the heavy hitters now posting in a current wizard oriented thread.
Thanks,
agrau
sector rotation strategy
- Thread starter emk662
- Start date
Here is what I do with to spot sector trends and rotation.
1 TC2000 has 239 sectors which I track on daily basis.
2 Use a weighted relative strength formula to identify fast moving sector
( (2 * C * 100 / C5) + (1.5 * C * 100 / C25) + ( C * 100 / C40) ) /4.5
This quickly spots a new sector move. I put this in a custom ranking which with some color coding gives you a visual view so sectors with recent ranks are green and then it becomes yellow and red so it is easy to visualize the same.
3 I Also track top 100 and bottom hundred stocks using the same. And that list I use to find out sectors, this is basically because in some sectors there are hundreds of companies and only few start the first moves.
4 Track sectors which are making all time high as these sectors show strong trend after that.
1 TC2000 has 239 sectors which I track on daily basis.
2 Use a weighted relative strength formula to identify fast moving sector
( (2 * C * 100 / C5) + (1.5 * C * 100 / C25) + ( C * 100 / C40) ) /4.5
This quickly spots a new sector move. I put this in a custom ranking which with some color coding gives you a visual view so sectors with recent ranks are green and then it becomes yellow and red so it is easy to visualize the same.
3 I Also track top 100 and bottom hundred stocks using the same. And that list I use to find out sectors, this is basically because in some sectors there are hundreds of companies and only few start the first moves.
4 Track sectors which are making all time high as these sectors show strong trend after that.
Why not take it a step further?
Make a chart of all those sectors, 3 months lets say. Put them on the same chart showing % gain/loss. Buy the top performer short the worst. Close the positions in a year, let's say. You will have had a long position in the top performer for the year, and a short position in the worst performer. By starting with a 3 month chart, you won't be rotating daily because by then some clear leading and lagging sectors will reveal themselves and will only, if at all, be crossed over a few times over the next year. Only way you can lose is if the top performing sector is a loser (or a very small winner) or nothing does particularly well and you end up rotating positions to stay with the top performer weekly or even more often in which case you will slowly fall away from the performance of the top sector due to coms/slippage/etc. Think about it
Thanks a ton, Grob. I really appreciate your time and efforts you put into your explanations! I see quite some logic in your reasoning that volume increases silently at the beginning, as people with "higher interests" prepare themselves for the next sector shift.
There's much value to think about in your writings, and I will go thru the ideas and thoughts.
Thinking about the data, I wonder if it is better to construct a equal dollar weighted or a cap-weighted sector proxy for my analysis. Equal-dollar weighted means a fair look at every stock in a sector. But are "people with higher interests" fair? They would prefer high cap stocks with high free float, as not to make too much noise, won't they?
Again, thanks to you. This is going to be quite interesting!
agrau
There's much value to think about in your writings, and I will go thru the ideas and thoughts.
Thinking about the data, I wonder if it is better to construct a equal dollar weighted or a cap-weighted sector proxy for my analysis. Equal-dollar weighted means a fair look at every stock in a sector. But are "people with higher interests" fair? They would prefer high cap stocks with high free float, as not to make too much noise, won't they?
Again, thanks to you. This is going to be quite interesting!
agrau
It depends on whether the sector breaks to all time high after a multi month base or basically it breaks after a furious rally from a significant correction.Quote from ig0r:
Why not take it a step further?
Make a chart of all those sectors, 3 months lets say. Put them on the same chart showing % gain/loss. Buy the top performer short the worst. Close the positions in a year, let's say. You will have had a long position in the top performer for the year, and a short position in the worst performer. By starting with a 3 month chart, you won't be rotating daily because by then some clear leading and lagging sectors will reveal themselves and will only, if at all, be crossed over a few times over the next year. Only way you can lose is if the top performing sector is a loser (or a very small winner) or nothing does particularly well and you end up rotating positions to stay with the top performer weekly or even more often in which case you will slowly fall away from the performance of the top sector due to coms/slippage/etc. Think about it
Like last week the lodging sector broke to all time high now there is a base , a cup and handle pattern and good volume , so I built positions in it and added to CHH which I was holding for over a year.
As against that aluminum sector made an all time high after a multi month rally and just corrected after that. Also individual issues can have significant corrections and you don't know whether that correction is going to resume the trend(e.g. I had a position in USNA for many months and it gave me over 300% return and then had severe correction but the sector continued to consolidate.
The sector rotation cycle also has some peculiarities some sectors just keep going without correction while some have three month rally and then they just have sideways move( e.g. the book publishing sector recently). So individual stock selection becomes a key and you have to keep ditching non movers and replace with new stocks with velocity. Sometimes I end up holding stocks for months sometime a sector makes a blowout move in few weeks like Security sector. So you have to play it accordingly.
What works on long side for sector does not work on short side. Shorting the sectors at bottom is not the best of the strategy.
Regarding shorting, sure, you can throw that out. Do you realize what I'm saying though? Regardless of the reason for why the sector we are long is performing better than the others, we hold it until a different sector rises above it in % gain from the point we did the picking (and then minus an additional 3 months because of the original look-back period). If you keep rotating and switching to the sector that has had the best % return to date, you will have had it's performance as well. As you know sometimes different sectors rotate in and do extremely well like you gave the security example, another would be mining right now; over the past year, the DJ mining index is up 242.44%, outperforming all other industries. By using this method, you're portfolio would have made about those returns over the past year
No need to hand-pick stocks, etc. etc. Just continue to rotate into the best performing index/industry/sector from a given date.Grob mentioned 200 sectors he monitors, easyguru has 239 in his TC2000 database.
I wonder how many sectors one show have, and how big/small a sector should be.
easyguru:
Any ideas which construction method for sector indices would be most appropriate? And which sector size would be the right balance between too sensible and too static?
Personally, I am tending to a arithmetic, equal dollar weighted index which gives each component equal importance. Regarding the number of sectors I lean towards a number of 59, as this the number of industries as defined by the GICS (Global Industry Classification Standard) of Standard & Poor's.
Thanks,
agrau
I wonder how many sectors one show have, and how big/small a sector should be.
easyguru:
Any ideas which construction method for sector indices would be most appropriate? And which sector size would be the right balance between too sensible and too static?
Personally, I am tending to a arithmetic, equal dollar weighted index which gives each component equal importance. Regarding the number of sectors I lean towards a number of 59, as this the number of industries as defined by the GICS (Global Industry Classification Standard) of Standard & Poor's.
Thanks,
agrau
Can we define sectors?...Industries?
Michael B.
Michael B.
There are 12 sectors:
Basic Materials
Capital Goods
Conglomerates
Consumer Non Cyclical
Consumer Cyclical
Energy
Financial
Healthcare
Services
Technology
Transportation
Utilities
Michael B.
Basic Materials
Capital Goods
Conglomerates
Consumer Non Cyclical
Consumer Cyclical
Energy
Financial
Healthcare
Services
Technology
Transportation
Utilities
Michael B.