Sector Rotation

Posted on December 13th, 2011

If you read our book, you know that you need to 'Unleash your inner guru!'. I know it sounds a litte 'granola'. But really, we just want you to invest in some individual stock and ETFs that you think will out-perform over your long-term time horizon. You will never know what kind of investor you are if you don't make some idiosyncratic investments like these.

My co-author and I regularly discuss our market hypothesis - and in doing so, we like to zero in on one. two, or three sectors we really like for the next year (or longer). And then we either invest in the sector ETFs that track these picks - or within stocks we particularly like within those sectors.

In 2011, we have liked Consumer Staples, Technology, and Energy. And those sectors have done well in 2011. See the chart below of ETFs that track the performance of each sector: XLK - Technology; XLP - Consumer Staples; XLE - Energy.
But in examining the performance of these three sectors against the broader market, Consumer Staples has had a really strong run. In fact, I'd say its rally is starting to look a little bit 'long in the tooth'. In fact, if you brought up a 2 year chart, you'd see that Staples have out-performed the S&P500 by nearly 20%.

The Consumer Staples sector is a popular defensive investment position. And if ever an investor wanted to play defense, the last 3 years would have qualified.

If you ever consider sector rotation for your 'Inner Guru' investments (and the authors do), then you might want to consider taking some of the profits in your Consumer Staples investments (remember Iron Rule #5: Harvest your Gains/Losses).

And if you like to invest in sector ETFs on a rotation basis, then you will need to start to think about finding a replacement for the Staples sector. The authors still like Technology and Energy - and we'll be on the look-out for another sector with good long-term investment potential. And of course, if you do find a replacement sector, make sure to follow Iron Rule #1: Hedge Every Investment.


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