Sector Timing for Conservative Market Timers

04/13/2015 6:00 am EST


Frank Kollar, of, highlights a long-term sector timing strategy that—though definitely not very glamorous or exciting—can still generate profits in the most volatile of bear markets, while other traders are watching their capital evaporate.

The current markets are as volatile as any seen since the 2008 bear market chopped more than 50% off the major indexes. We may not have a bear market in our immediate future, but knowing that individual sectors will exit in time to protect us is important.

Volatility is great if it is within a trend, and it often precedes a new trend, causing unnecessary anxiety in inexperienced market timers. But volatility is also needed to profit, something that many market timers forget.

Trading the Sectors

How does a market timer take advantage of volatility, while protecting himself or herself from the very real risks such volatility creates?

The answer is by trading the sector funds. Here is a quick list of reasons why:

1. Diversification: By having small positions in multiple industries, you reduce exposure to any single industry being affected by a negative news event.

2. Volatility: While individual sectors are no less volatile than the rest of the market, they do not move together. So the volatility to one's portfolio is considerably reduced.

3. Drawdowns: Because sector funds go to cash during sell signals and because there are always some funds in bull markets at the same time there are others in bear markets (during which those sectors are protected in money market funds), drawdowns are kept to a minimum.

4. Good in All Markets: There are always single industries in their own bull markets. Even during a cyclical bear market, such as we experienced during 2008, there were always some industries moving higher. And if not, you are still protected by being in money market funds.

5. Active Timing: Though sector timing is not aggressive, it is certainly active. You will always be trading the bullish sectors and exiting the under performing ones. In some respects, it is the equivalent of running your own well managed mutual fund.

6. Trends: Industry sectors tend to trend. And when they trend, they often move further (in either direction) than anyone expects. During a strong bull run, it is common to find individual sectors that double the gains of the overall market.

Winning the Battle

This is proactive money management at its best. Constantly putting your money in the strongest sectors while removing it from the weakest sectors during downtrends.

This is where the diversity inherent in sector timing stands out. Top performing sectors are where your timing funds are allocated and no one sector can cause irretrievable damage to the portfolio should that industry collapse without warning.

But most importantly, as a portfolio strategy, sector timing has been winning the battle against a stock market that has gained little in the past ten years for buy-and-hold investors.


Over the years, sector fund timing may go down as the "best conservative strategy" because of its ability to target funds into only those industry sectors which are performing well.

The low drawdowns, low volatility, and diversification inherent in sector timing, not to mention strong profitability, cause this strategy to stand out from all the others.

In volatile market conditions, sector timing can create profits while other traders are watching their capital evaporate.

While sector timing may not make huge gains during cyclical bear markets, being mostly in cash, the strategy will protect your investment capital. And it will then perform well during bull markets, always keeping you invested in those industries that are in their own bull markets.

Caveat...sector timing does require active participation. Perhaps we should say it is for "active conservative market timers."

Sector timing also requires a minimum account size. Remember, there could be as many as 16 open positions at any one time and closed (bearish) positions should be in cash (money market funds) with those funds remaining untouched. A good guess is that a sector timing portfolio should be at least $25,000 to start.

A new market timer could select seven or eight of the major sectors and create a smaller portfolio. For example: Consumer Products, Energy, Financial Services, Health Care, Leisure, Retailing, Technology, and Utilities.  

By Frank Kollar, Editor,

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