Sector Rotation Dashboard

Understanding Sector Rotation

What is sector rotation and why should I care?

All sector data on this page tracks the 11 GICS (Global Industry Classification Standard) sectors via Select Sector SPDR ETFs. Sector rotation refers to the movement of investment capital from one market sector to another. Different sectors perform better during different phases of the economic cycle, and understanding these patterns can help you position your portfolio appropriately.

Think of it this way: when the economy is expanding, cyclical sectors like Technology and Consumer Discretionary tend to lead. When economic growth slows or uncertainty rises, investors rotate into defensive sectors like Utilities and Consumer Staples. Tracking rotation patterns helps you stay ahead of market trends and avoid sectors that are losing momentum.

What do the leadership statuses mean?

We classify market leadership into five categories based on how many sectors are advancing:

• Broad (8+ sectors positive) - Healthy bull market with widespread participation across sectors. This is the strongest configuration for sustained rallies.
• Narrow (6-7 sectors positive, low rotation) - Rally is driven by a smaller group of sectors. Less sustainable than broad leadership and more vulnerable to corrections.
• Rotating (6-7 sectors positive, high rotation OR 4-5 sectors positive) - Leadership frequently changes between sectors, indicating a transitional period. Market lacks clear direction.
• Defensive (2 or fewer positive) - Risk-off environment where capital flows to safety. Most sectors declining, suggesting economic concerns or bear market.
• Mixed (3-5 sectors positive, stable) - Uncertain market conditions with no clear trend. Neither bullish nor bearish conviction.

Which sectors are cyclical vs defensive?

Understanding the cyclical nature of sectors helps you interpret rotation patterns:

Cyclical Sectors (economically sensitive, perform best during growth):

• Technology (XLK) - Benefits from business investment and innovation spending
• Consumer Discretionary (XLY) - Sensitive to consumer confidence and spending
• Financials (XLF) - Profits from lending, trading, rising interest rates
• Industrials (XLI) - Benefits from infrastructure spending and manufacturing
• Materials (XLB) - Tied to construction, manufacturing, commodity demand
• Energy (XLE) - Correlated with oil prices and economic activity

Defensive Sectors (stable demand regardless of economy):

• Consumer Staples (XLP) - Essential products (food, household items) with consistent demand
• Utilities (XLU) - Regulated monopolies providing electricity, gas, water
• Healthcare (XLV) - Healthcare needs remain constant regardless of economy

In-Between Sectors:

• Communication Services (XLC) - Mix of defensive (telecom) and growth (media, tech)
• Real Estate (XLRE) - Interest-rate sensitive, provides income, has growth elements

How do I use this dashboard for investing?

Here are practical ways to apply sector rotation analysis:

1. Identify market regime - When cyclical sectors dominate the top performers, it signals economic optimism (risk-on). When defensive sectors lead, it indicates economic concerns (risk-off).
2. Diversify intelligently - Avoid overconcentration in bottom-performing sectors. If multiple sectors you own are lagging, consider rebalancing.
3. Spot trend changes early - When defensive sectors suddenly start outperforming (especially with frequent leadership changes), it may signal an upcoming market correction.
4. Time sector ETF investments - Consider allocating more to leading sectors and reducing exposure to persistently lagging sectors.
5. Confirm market health - Broad sector participation (8+ sectors positive) confirms a healthy, sustainable trend. Narrow leadership suggests the rally may be fragile.

What do leadership changes tell me?

The "Leadership Changes" metric tracks how many times the top 3 performing sectors changed over the last 5 days. Here's how to interpret it:

• 0-1 changes - Stable leadership. Market has clear conviction about which sectors to favor.
• 2-3 changes - Moderate rotation. Normal market behavior, some shifting of preferences.
• 4-5 changes - High rotation. Market is indecisive, capital moving between sectors without clear conviction. Often occurs during:
  • Transitional periods between market regimes
  • After major sector moves that trigger rebalancing
  • During uncertain economic outlooks or pending major events

Key insight: Stable leadership with broad participation (few changes, 8+ sectors positive) is the strongest bullish signal. Frequent rotation with narrow participation (many changes, few sectors positive) suggests waiting for clearer trends.

Economic cycle and sector rotation patterns

Different sectors typically lead during different phases of the economic cycle:

• Early Cycle (Recovery) - Financials, Industrials, Materials benefit from economic acceleration
• Mid Cycle (Expansion) - Technology, Consumer Discretionary thrive as growth continues
• Late Cycle (Peak) - Energy, Materials see price increases, defensive sectors start attracting interest
• Recession (Contraction) - Consumer Staples, Healthcare, Utilities provide safety and stability

While these patterns aren't perfect, they provide a framework for understanding why certain sectors outperform at different times. Use this dashboard to identify which sectors are currently leading and consider what that suggests about the current economic environment.