Reading Sector Trends: Sector Rotation on a Chart

What a sector is

A sector is a grouping of companies in similar businesses. S&P 500 members are divided into 11 sectors under a widely used industry classification. Even when the index moves only a little on a given day, there are often sectors that rose sharply and sectors that fell sharply within it. Splitting the market into sectors reveals movements that a single index hides.

• Information technology, communication services
• Consumer discretionary, consumer staples
• Health care, financials
• Industrials, materials, energy
• Utilities, real estate

The idea of sector rotation

Sector rotation is the idea that as the economy moves through recovery, expansion, slowdown and recession, the relatively strong sectors change in turn. Textbooks often say, for example, that economically sensitive sectors do well in a recovery and that sectors selling everyday necessities hold up better in a slowdown. But real markets often do not follow that order, and which phase we are in usually becomes clear only in hindsight. So sector rotation is more realistic as a framework for sorting out which sectors are currently stronger or weaker than the index than as a formula for predicting the future.

Ways to see sector trends on a chart

Sectors are not traded directly, so their trends are usually read from charts of exchange-traded funds or sector indexes that track them. Common methods are listed below.

• Read a sector fund's price chart together with moving averages
• Divide the sector price by the S&P 500 to get a relative strength line against the index
• Line up one-week, one-month, three-month and one-year returns by sector
• Rebase several sectors to 100 on the same day and plot them on one chart

Cyclical and defensive sectors

Another common approach splits sectors into two broad groups. Sectors whose earnings swing with the economy are called cyclical, and sectors with relatively steady demand regardless of the economy are called defensive. When cyclicals are stronger than defensives, many read it as market participants taking on more risk; the reverse is often read as caution. Some sectors, such as utilities and real estate, are also known to be sensitive to interest rates, so some people read them alongside a rate chart. Either way, these are interpretations, not signals to rely on.

Reading Korean and US sectors together

In Korea, the chip sector that includes Samsung Electronics and SK Hynix carries a large weight, so its trend often looks like the trend of the whole KOSPI. Putting it next to the US information technology sector or a semiconductor index lets you separate periods when the two markets move together from periods when they diverge. However, Korean industry classifications and US sector classifications use different standards, so groups with the same name may hold different stocks; daily candle dates are a day apart; and the currencies differ. When comparing, rebase to 100 on the same day or convert to won first.

Common traps

These traps are easy to fall into when reading sector trends. The more striking the colors on a heatmap, the more careful you should be.

• Looking only at short periods: one-week return rankings flip often
• Explaining after the fact: it is easy to attach a plausible story to a sector that already rose
• Ignoring differences within a sector: stocks in the same sector can move very differently
• Concentration in large caps: sector funds are market-cap weighted too, so a few stocks can drive a sector

Check it with this site's live tools

The sector heatmap shows one-day to one-year returns for the 11 US S&P 500 sector funds and Korean industry funds in a color grid, and also calculates excess returns over the S&P 500 and KOSPI, so you can check this guide's methods right away. The stock comparison tool lets you rebase sector funds and indexes to 100 on the same day, and the monthly returns tool shows month-by-month patterns for indexes and stocks. Prices may be delayed.

Things to keep in mind

This guide explains how to read sector trends on a chart and is not investment advice. A sector that was strong recently is not guaranteed to stay strong, and sector rotation does not follow a fixed order. Sector classifications and fund holdings can change, so check official materials from fund managers and index providers.