Tailoring Your Sector Strategy

Jackie Ann Patterson Author, Truth About ETF Rotation

Keeping track of sector shifts is important, but investors need to stay true to themselves as well, says Jackie Ann Patterson, who explains how to do that in a sector strategy.

As traders and investors, we want to find the best areas that are going to make the most money for the next few months, or few weeks even. Our guest today is Jackie Ann Patterson to talk about sector rotation and how to find the right strategy. So Jackie, talk about how to find the right sector rotation strategy.

OK, well, I think it's important to understand what your goals are and what your tendency is toward work. I mean, one of the big questions is how often do you want to evaluate the sectors, whether that's daily or weekly or monthly, and that's going to depend on how much time and willingness to trade that you really have.

The other thing to do is to look at how far back do you want to go when you're picking the criteria for switching. So you need to select something that's going to be the criteria, and I think that comes down to another fundamental preference. Do you look for the momentum, the funds that have already gone up, and pick the proven leader, or do you look for the bargain and find the ones that have gone down and been beaten down and turned up?

I can back test the two different strategies and see some differences in performance. And yet I think that the difference in that performance may be so narrow that it's more preference. People who are diehard bargain hunters are probably going to want to get that bargain, and people who want to follow the trend will be going for the higher, faster-moving ETFs.

So if fundamentals play into this, and just understand the overall economy and which areas are strong, how about technical analysis? Do you use that to then technically see where we're at?

Yes. With technical analysis, I rely on that more and more. I think that that's more my area of expertise, and that it's somewhere that I can have an objective rule.

I can say, for example, which one has had the highest rate of change or the highest percentage gain over the past couple of months, and that is something that I can very easily and quickly set a rank for the set of ETFs that I'm going to rotate between.

Whereas with the fundamentals or understanding the economic cycle, I think that's a little bit softer in that it's not objective. But it's hard in the sense that it's difficult, and it requires a lot more skill to make a good decision that way.

And you mentioned that you could even check it nightly, which is really short-term. Does that still work? Does sector rotation work on a really short-term basis?

Well, I think that's going to depend...I think yes it does. It can work on a short-term basis, and you have to match your selection criteria to it.

So as I was back testing, I found that on the short-term selection, buying into the bargains was much better. This was for long-only sort of strategies, and that if you have a longer-term horizon or if you're only going to look infrequently, then it did better to buy into the more momentum or the higher performing funds.

But for the daily turnover, yeah it can work, but you definitely don't want to be buying in right when something has just spent the last two or three days running up and it's ripe for a pullback.

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