Sector rotation is one of the easiest and top performing trading strategy. It is easy because you have to track markets only on daily time frame and hence requires little dedicated time. It performs well because other strategies in similar time frame (holding period > 6 months) tend to get whipsawed in current economic mess.

The strategy is so much in demand that ETFs have been launched entirely to mirror a sector rotation portfolio. The Guggenheim/Zacks Sector Rotation ETF (Ticker: XRO) seeks to provide investment results that correspond generally to the performance of an equity index called the Zacks Sector Rotation Index. However, it is illiquid, and past performance data does not covers a full market cycle.

Take past 6 months sector performance for example. The defensive sectors of Consumer Staples, Health Care, and Utilities (XLP,XLV,XLU) are performing much better than the leading sectors of Financials, Technology, Consumer Discretionary and Industrials (XLF,XLK,XLY, XLI). This means money is flowing to the defensive sectors; i.e. the overall market is bearish. The regional banks topped out much earlier than DOW as a sign of warning (also mentioned here ). I have also attached the sector scenario for market bottom in 2009, which looks just the reverse of current situation.

To use the list of ETFs, please keep the following points in mind:

1. Illiquid ETFs may be used as indicators for market trend but do not use them for actual trading because they have tendency to deviate erratically from benchmark returns.
2. The Equal weighted Rydex ETFs (first ticker letter R) tends to mirror the broad markets.
3. The Is and Xs are market-cap weighted, meaning that larger companies have greater representation in the index. So far they have been the best indicators for identifying business cycles.
4. Small Caps tend to outperform in the last leg of a bull market.
5. There are also ETFs managed by rule based quantitative analysis by First Trust and Powershares. However, comprehensive information on the selection criteria is not available.
6. The inverse ETFs or Short ETFs do not actually reverse the returns of their benchmark. You are better off shorting a relevant ETF than buying it’s inverse.

SECTOR-WISE LIST

XLY Consumer Discretionary Select Sector SPDR

RCD Consumer Discretionary

IYC iShares Dow Jones U.S. Consumer Services Sector Index Fund

PSCD S&P SmallCap Consumer Discretionary Portfolio

AXDI MSCI ACWI ex US Consumer Discretionary Sector Index Fund

XLP Consumer Staples Select Sector SPDR 10.84%