Sector Rotations & How to Find Them

February 5th, 2022

Financial markets are dynamic and always-changing. If Technology stocks are rising today, Energy stocks might be rising tomorrow because of how markets fundamentally and technically change with time. Sector analysis is a form of macro analysis that tries to find statistics about how sectors are behaving in the markets. Sector rotation refers to the phenomena where money flows from one sector to another due to a variety of reasons, both fundamental, and technical. An example of sector rotation can be money flowing from the Real Estate sector to the Technology sector in case the real estate market becomes significantly overvalued, and starts coming down heavily. It is paramount to be aware of how & where rotations are happening, and can provide traders a great edge as we will see in this blog post.

Sector Rotation at Tradytics

In order to make your life easier for identifying sector rotations, Tradytics has a widget for you in the Overall Market Dashboard called Sector Rotation. The widget shows you the cumulative performance of each sector's ETF (Exchange Traded Fund) over some historical period. The visual aspect of the tool lets you find the leading and lagging sectors within a few seconds.

The image above demonstrates the Sector Rotation widget. On the top right is the option to change the historical time-period for which you want to see the price changes in Sectors. On the top are the sectors along with their ETF symbols. As mentioned earlier, each line is the cumulative percentage change in the price over some historical data. In order to find short term rotations, we typically use small historical time period such as a week or two, while for longer term analysis, we use something more than a month i.e > 30 days.

Looking at the chart above, it is quite clear that the Energy sector has been significantly outperforming the entire market since the start of 2022. If we had looked at this chart at the first or second week or 2022, we would have still seen a nice divergence between the entire market and the Energy sector. The former had started to go down while the latter kept going up, showing notable strength. Once we do a visual analysis of the chart and find top sectors, we can dive deeper into their individual symbols to find potential setups.

Sector Breakouts

For the purpose of this discussion, we can assume that we saw the chart early 2022 and knew that Energy sector was doing better than the overall market. With that information, the next question is to see when to enter into individual stocks from the sector. To that end, there's another great widget in the Stocks Market Dashboard that shows you price comparison with market indices such as SPY & QQQ. One of the ways we can identify entries into leading sectors is when they relatively break out compared to the market. The figure below demonstrates this.

The right figure shows that Energy (XLE) vs SPY pair started to go up rapidly at the start of 2022. However, it had also tried to move up historically but always ended up coming back from a certain level. Similar to how breakouts exist for individual stocks, they also work for more macro level analysis. Around start January, we can see that the relative performance started to break above the resistance level that it had a hard time previously breaking. There were two levels and the break of either level would have been our potential entry into the sector and its constituents. The first one broke early January and the second one broke around 18th January, 2022. Both of them gave us an indicator that this sector is starting to move considerably better than the market.

How to find Leaders in the Sector?

With the knowledge that we now know about the leading sector, the question arises - How do we find good stocks in the sector that we can trade shares and options with? That's an excellent question and we are going to answer it now. Tradytics has got you covered here too - Scany is our stock scanner that lets you filter stocks based on a variety of criteria, including Sectors. The image below shows the tool - you can filter by sector, and sort the table based on either the price change, market cap, or any of the other capabilities that the tool provides.

Once we filter down by the sector, and sort by the market cap, we get the following view on January 18th, 2022. We can see that the highest market cap stocks in the sector are also leading it quite well. XOM has the highest market cap in the Energy sector and it had already gone up 20% in the last 30 days. When following a sector rotation, we always want to enter positions in the leaders of the sector. There will always be stocks in top sectors that are not performing well, we want to ignore those.

When following a sector rotation, we always want to enter positions in the leaders of the sector. There will always be stocks in top sectors that are not performing well, we want to ignore those.

Case Studies - XOM & OXY

Finally, let us talk about two stocks from the Energy sector that we ourselves at Tradytics built some positions in. At around Jan 15, 2022, it was clear that Energy sector was dominating the market from a bullish perspective. All that was needed was a technical signal, such as a breakout of the XLE/SPY pair for us to create bullish plays in the leaders of the sector.


ExxonMobil XOM is the first case study. On January 18th, 2022, price was consolidating after a bullish run, and the sector had just broken out. Price was also above most of the common moving averages such as 9, 20, and 50. That signified a strong uptrend, and the small consolidation on lower volume shows us that it was just temporary profit taking. An entry at that time would have netted retail traders about 20% gains in just 20 days (it is February 5th, 2022 at the time of writing this post). Those are great results for shares, and would have been much larger for options (calls).


Occidental Petroleum OXY was another notable stock in the Energy sector. Similar to XOM, it was also in a strong uptrend. However, just to highlight how there needs to be a little bit of technical analysis to find high probability plays, we can see here that entering directly after the breakout might have caused us some small loss early on. However, there was no reason to exit since we were staying above the anchored VWAP (AVWAP) from the lows, which can act as a very strong support level in uptrends. Despite the small dip, an entry, both on the dip or on the sector breakout, would have given us about 10% gains in 20 days, which is not bad.

Tips & Tricks

The two case studies above were two examples of how we can do macro sector analysis, find rotations, and enter into bullish positions in the leaders of leading sectors. However, for the sake of simplicity, we entered after the entire trend was fully confirmed. Users could have entered as soon as the uptrend had started - such as when the price moved above the 20 or 9 moving average. Here are some random tips and tricks while following sector rotations.


    When looking for stocks in a sector, please always try to find leaders. Leaders are the stocks that have high market cap generally, and are performing the best in terms of price change.


    If you do not want to miss the early run when money if rotating to another sector, you can do the entire analysis mentioned in this thread, but start to build positions early on in the trend. Sometimes, the trend might fail and you will lose some money. But if the rotation is indeed meaningful and accurate, you will be able to garner significantly more profits compared to only entering after the trend is fully confirmed. Start small positions, and grow them as the trend becomes stronger.


    A little bit of technical analysis can go a long way in entering into the right setups. For instance, while entering in bullish positions, just making sure that the price is above the short term moving averages, there's an anchored VWAP support below, etc, can improve the probability of your plays. You can also use the Scany tool to filter for different technical setups, saving you a lot of time.


    If you want to be an early bird in catching the rotation, you have got to catch the flow as well. Similar to how we have a sector rotation widget based on price changes, we also have one based on options flow, in the Options Market Dashboard. You can use that to add more confidence in your analysis. A screenshot of the sector flow tool is added below.

Final Thoughts

Similar to how important it is to invest your time looking for the right stocks, it is also important to look for the best sectors. This post discusses a sector rotation guide that retail traders can use to add a small edge in their trading. Trend following in the leaders is a great strategy for all kinds of traders, and always following the leading sector can help prevent large losses. We hope this guide is useful to you and will only improve your trading. Thank you for reading.