Intermarket Analysis: Profiting from Global Market Relationships

CHAPTER 13

The Impact of the Business Cycle on Market Sectors

SECTOR ROTATION WITHIN THE BUSINESS CYCLE

The previous chapter showed how the business cycle has a major impact on the relationship between bonds, stocks, and commodities (and also how the position of these three markets tells us something about the position of the business cycle). This chapter shows how the business cycle impacts sector rotations within the stock market. There are two goals here. One is to show that different market sectors do better at different stages of the business cycle. By tracking the business cycle, one is able to anticipate which sectors will give the trader the “most bang for the buck” at any given time. The second goal is to show that sector rotations follow a repetitive pattern where money flows from one sector to another as the economy goes from expansion to contraction and back to expansion. By studying which sectors are leading the overall stock market at any given time, the trader can also make a more reasonable estimate as to where exactly the business cycle is. In this sense, the study of sector rotation can also play a role in economic forecasting.

SECTOR ROTATION IN 2000 FAVORED CONTRACTION

The subject of sector rotation within the business cycle was introduced in Chapter 7, which covered the stock market topping process during 2000. That chapter showed how sector rotations during that year signaled the end of the economic expansion of the 1990s and the start of an economic ...