Trading with Intermarket Analysis

CHAPTER 9

The Impact of the Business Cycle on Market Sectors

This chapter explains how various market sectors act at different stages of the business cycle. Shifts in sector leadership tell us a lot about the state of the business cycle and the stock market. A sector rotation model gives a visual representation of the business cycle’s impact on rotating sector leadership. Other visual tools are shown that are helpful in spotting sector leaders and individual stocks within those 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 those 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 (and vice versa). 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 should be upgraded in one’s portfolio (and which ones to downgrade). 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 stock market at any given time, the trader can make a more reasonable estimate as to which way the business cycle ...