Using Sector Rotation to Find the Leadership

On the webinar last night we discussed how to trade using sector rotation. To follow up on that theme I wanted to break down one of the leading sector today in my notes. Healthcare is currently one of the top sectors for the S&P 500 index. If you look at the chart below of XLV, SPDR Healthcare ETF you will note the break higher on Tuesday above the previous high and setting the pace on the upside.


This begs the question of what is leading the healthcare sector? The next chart below shows the sub-sectors ETFs of the broader healthcare sector IHF, IHI, XPH, XBI, IXJ and Industry group Healthcare Information (MG826). The chart starts at the November 15th shift in the S&P 500 index trend to the upside. The bold white line is XLV, the broad healthcare sector with the other ETF plotted around it. The goal of this chart is to visually see the leadership within the sector. Biotech (XBI) has been one of the leaders since the low. The pullback over the last week plus is shown clearly on the chart with the healthcare information sub-sector accelerating to the lead. I find these type of charts helpful for breaking the market or sectors down to find the leadership.

Hcare Sectors

The chart below pushes the timeline forward to the December 28th low off the pivot point off the fiscal cliff issues that caused the markets to pullback. You can see the acceleration in the information healthcare sector clearly on the chart. This again is helpful for know where the money is rotating to and gives us the ability to find the leaders within the sector and put money to work where it will potentially be treated the best.

Hcare Sectors

If we wanted to break down the information healthcare sector and look at the stocks, the table below shows the leadership by percentage return off the February 25th low from the FOMC minutes pullback. There are only 11 stocks in the sector and we could have found ADAT or MRGE as the rising leaders off the test.

1 table

The point of this exercise is once again to find the leadership of the market visually by comparing first the broad sector groups to the major index and then digging into the sectors to find sub-sectors or even stocks that are leading. While the screening process is simple enough to follow, the disciplined trading strategy that accompanies this process is what is important. Defining how to get into positions, manage those positions and then exit those positions if what make a successful investor. The screening or filtering process is simple part. Unfortunately most investors are focused on the screening and not the investing.

We are having a Webinar on Portfolio Management part of this process next Thursday night, April 4th at 8 pm. You can sign


up on the home page of of Jim’s Notes.