United we win, divided we fall. This fits perfectly in the stock market. We always see how a stock is performing, but we forget to check how its sector is performing. In our daily lives, we see there are some sectors that have booming business opportunities and some that are already flying high. The same happens in the stock market.

The stocks are led by the sector and the sector is led by the stocks. Stock and sectors always go hand in hand. This is the reason many swing traders find good and reliable trades with the help of advanced sector rotation analysis.

Sector analysis involves studying sectors and then forecasting the price movements of the stocks. Swing traders who want to catch short moves in the price in a few weeks and months highly benefited from the sector rotation strategy. Sector rotation involves the rotation of sectors from high to low.

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Neither all sectors are up at the same time, nor all sectors down at the same time. A good trader needs to study the candlestick charts and go through the past price movements of the sector. This helps in tracking how stocks have been performing in certain circumstances.

Keeping the technical analysis aside, when we consider the economic aspects, no sector can always be flourishing or always be at the bottom.

In recent times we can consider the example of PSU banks. The sector was down for almost 3-4 years. In the meantime, many traders and investors were losing their trust in the stocks of PSU banks.

But, here one needs to remember that no sector can be down and keep hitting new bottoms for this long. Especially, when the sector is led by the government. Swing traders who kept track of the price movement of the PSU sector and analyzed its stocks well enjoyed their upward move significantly.

The sectors are always rotating between highs and lows. When one is down, the other might be up and have the potential to go up. A thorough sector analysis with the help of technical analysis and techniques helps in finding potential in the sector. Further, when you know the sector holds the potential to go up, you study its stocks. When the analysis of the sector and the stocks goes hand in hand, it is not hard to find opportunities for swing traders.

The sector’s rotation is necessary to maintain the economic balance in the country. To maintain the balance, sectors move systematically at certain stages. These stages can be identified as expansion, contraction, peak, and trough.

The expansion phase refers to the growth stage of the sector. Here the stocks of the sector can see good up moves irrespective of the market direction. In the contraction phase, the sector is in the decline stage. Here, the stocks of the sector, that once saw good growth, can witness consecutive decline.

Other great sectors to monitor in the stock market are the ones that are at peak or in through (bottom). Sectors are at a peak when their stocks which comprise a major percentage of the sector are at all-time high.

Apart from this, the sector is at a trough when their stocks are nearly trading at an all-time low.

At every point in time, sectors are in any one phase of this cycle. For example, in the times of COVID-19, the IT and pharma sectors flourished, whereas PSU banks were at the bottom. But, in current times, pharma is almost at the bottom and PSU is trading at an all-time high. On the other hand, the IT sector is in a decline phase.

Despite the type of technical analysis swing traders use, they can benefit from sector analysis and sector rotation, if they understand the mechanism and principles well.

The reason behind sector rotation is the rotating funds of institutions. Institutional buying and selling is responsible for growth or decline in any sector. All you need to master is tracking institutional behaviors, half the code of the market is already cracked there.

(By Sooraj Singh Gurjar, Founder and Managing Director, Get Together Finance (GTF))

Disclaimer: This is the author’s personal opinion. Readers are advised to consult their financial planner before making any investment.