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Sector Rotation is the New Norm, But You Can Make Big Money When It Stops

Sector rotation used to be a rare occurrence; now it happens all the time. But when the rotation finally ends you’ll want to take big swings.

Sector rotation used to be a rare occurrence; now it happens all the time. But when the rotation finally ends you’ll want to take big swings.

When I first started at Cabot back in 1999, the market was almost always pretty uniform—obviously, some sectors here or there (gold, energy) could dance to their own drummer based on certain factors, but sector rotation was the exception rather than the rule for different parts of the market to diverge. If the overall market was headed higher, chances are growth stocks were doing the same, and vice versa. In fact, divergences over many weeks or months usually showed up only near meaningful market high points.


However, in the past 10 to 15 years, that’s changed—we routinely see bouts of rotation, with one sector or theme coming into favor for a while, only to see a reversal of that a few weeks later. That’s the situation we’re in today. Take a look at the newly popular Ark Innovation Fund (ARKK), which plays in most of the pure rapid-growth names we do, along with the Innovator IBD 50 Fund (FFTY), both of which are proxies for the growth area of the market—you can see both are languishing below their 50-day lines even as stuff like the Dow Industrials are at new highs.

Sector rotation has been hard on growth stocks of late.


Sector Rotation Swings to Cyclicals

So what about cyclical stocks? As we’ve written many times, they can be worth playing; in fact, we’re intrigued by some these days given that they just had a horrid few years. But there are a couple of things to be aware of before you start plowing into a bunch of financials and oils. First, because most of their businesses are subject to outside forces (interest rates, currencies, commodity prices), they can be very hard to hang onto, with uptrends disappearing in a matter of days. Just something to be aware of.

As for the here and now, it’s good to know that these cyclical areas have now been running for more than five months without any real correction. That doesn’t mean they have to pull in here, but there’s certainly the potential for an air pocket or two. Again, that doesn’t mean we’ll never pull the trigger on a non-growth name (we’re still following a couple of energy and Bull Market stocks), but it’s not a high-odds proposition, at least not at this moment.

Bigger picture, the point of this exercise is to remind you that, as the famed Jesse Livermore once said, the big money is in the big swing—getting in early in a new, sustained advance for a young-ish growth stock and riding it for months (or years). That time will come again, and maybe sooner than many think depending on how earnings season goes. When it comes, I can help you identify the next leading growth stocks to buy in my Cabot Growth Investor advisory, where we’ve been taking big swings early in big market advances for years, with quite a bit of success.

But until then, it’s best to keep it light and let everyone else fight it out on a daily basis while we wait patiently for the next leaders to launch.

*Editor’s Note: This post was excerpted from the latest issue of Cabot Growth Investor. To read more, click here.


A growth stock and market timing expert, Michael Cintolo is Chief Investment Strategist of Cabot Wealth Network and Chief Analyst of Cabot Growth Investor and Cabot Top Ten Trader. Since joining Cabot in 1999, Mike has uncovered exceptional growth stocks and helped to create new tools and rules for buying and selling stocks. Perhaps most notable was his development of the proprietary trend-following market timing system, Cabot Tides, which has helped Cabot place among the top handful of market-timing newsletters numerous times.