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The Importance of Rotation

Today I would like to talk about the importance of Rotation.

Rotation is a strategy used by professional fund managers all the time, but rarely used by retail investors – and that is a mistake.

If you are managing your own portfolio, then you are a portfolio manager and as a portfolio manager, it is important to actively control your investments.

Rotation is the movement of money invested in stocks from one industry to another as the portfolio manager anticipates the next stage of the economic cycle.

Nothing lasts forever, particularly in today’s fast-reacting stock market. Rotation plays out like this:

An external incident often triggers one segment of the market to move. For example, an increase in interest rates often causes the financial sector to rally.

Retail traders see this move up in that sector and decide these stocks look like they are heading higher – I will buy some. Usually, they are late to the party here, but that is not the point of this note.

The reason financial stocks move higher is that they are expected to earn more in a higher interest rate environment. Stock valuation models spit out higher stock valuations and hence traders bid the stocks up to that price.

But once the stock price has adjusted to the new valuation they tend to stop moving higher. Stocks don’t go up forever. At some point, stock prices become overvalued and the increases stop.

When this happens, the big money starts looking around for the next segment. Let’s say it becomes healthcare. Big money sells their financials as they know the run is done and stock prices have reached model valuations. They then take this money and put it to work in the next sector and the story repeats

We don’t often see retail traders do this. Retail traders tend to see a segment move higher and get in late to the move and then sit there and wait while the rest of the market has moved onto the next hot segment.

Back on November 9th of last year, when the vaccine was announced, we saw tech stocks retreat while large blue chips advanced. This was a classic case of rotation. The run in tech had come to an end. Money was now to be made in a different area.

Yet we still see retail investors stubbornly hold on to their tech shares because they fall into the mistaken belief that because these shares have recently gone up in price they will always go up in price.

If you want to improve your returns then you need to start thinking like a big-money stock investor. Get ahead of the curve and anticipate what is going to be the next sector they move into. Don’t be last to their party when they are leaving.

Our friends at Bespoke Investment Research recently sent us a great chart that shows which sectors have led the advance in the S&P500 since the pandemic began last year. They have kindly colour coded it so you can see how big money has rotated into and out of different segments throughout the rally.

Most recently it is Technology, Consumer Discretionary, and Consumer Services that have led the market higher, but you can see from the chart how this changes over time.

If you want to improve your returns then you need to start thinking about the future. What segments are likely to advance next? Then buy stocks in those segments. Don’t just sit on your hands with your old stocks. What happens in the future, will not be the same as the past.

We use this concept of rotation in our Top 30 trading strategy. Every month we rotate the stocks looking for the next set of winners. It has worked very well so far, with gains of +89% in the last 10 months.

Of course, the big question is “how do I know which segment to rotate into?”. That is a good question and one that the Top 30 stocks will tell you. For it is the analysts on Wall Street that decide this.

They sit there all day performing their research and predicting what is going to move next. The big money uses this research to start positioning for the move

Our Top 30 strategy uses the very same research the big money on Wall Street looks at. Every month, when you look at the Top 30 stocks you can see what segments they think are about to move.

If you want to receive the Top 30 stocks each month and see which segments they are predicting will move next, then sign up to our free newsletter

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We are going to publish our new Top 30 list on Monday, May 3rd. But here is a sneak preview, at the moment it looks like Banks and Retail are going to be where the action is.

Matthew Jones

Director Capital 19

Performance and profit calculations are theoretical and calculated by Capital 19 and do not reflect actual investments in the companies mentioned they also do not include the costs of commission or the effects of exchange rates or taxes. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. Past performance is not a reliable indicator of future performance.

Disclaimer: Capital 19 Pty Ltd ABN 17 124 264 366 AFSL 441891 (‘Capital 19’) believes the information contained is reliable, however, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. This communication is for general information only and was prepared for multiple distributions and does not take account of the specific investment objectives of individual recipients and it may not be appropriate in all circumstances. Persons relying on this information should do so considering their specific investment objectives and financial situations. Any person considering action based on this communication must seek individual advice relevant to their circumstances and investment objectives. Subject to any liability which cannot be excluded under the relevant laws. Any opinions or forecasts reflect the judgment and assumptions of Capital 19 and its representatives based on information at the date of publication and may later change without notice. Any projections contained in this presentation are estimates only and may not be realised in the future. The investment manager certifies that all the views expressed in this document accurately reflect their views about the companies and securities referred to in this document and that their remuneration is not directly or indirectly related to the views. Capital 19, its directors, representatives, employees or related parties may have an interest in any of the companies and securities in this document and may earn revenue from the sale or purchase of any financial product referred to in this document or any advice. Past performance is not a reliable indicator of future performance. Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this document is prohibited without obtaining prior written permission from Capital 19.
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