Build a sector rotation model with PowerRatings

In a

recent article
I showed how you can trade emerging markets by using

. Today’s article is going to extend the same principle to trade
specific sectors within the economy. It is possible to build a sector rotation
model to take advantage of the
by using ETFs.

Here is a very simple
sector rotation strategy built around trading the
Select Sector SPDRs
. By tracking this list of nine sectors you will be
able to monitor which sectors are getting stronger, and which sectors are
getting weaker.

You could look to buy the strongest sectors (PowerRatings of 7 & 10) and sell (short)
the weakest sectors (PowerRatings of 1 and 3). This strategy can be taken a step
further by drilling down to see the individual sector components and their

Here’s an example: Let’s say that the XLF (Financials) has a PowerRating of 9.
You may want to buy the XLF, or you could buy the components of the XLF that
have the highest PowerRatings (7 – 10). Obviously you would have to take sector
weightings into account but this could be done by adjusting the number of shares
you buy (the full component list and sector weightings are updated daily on the
SPDRs website).

Symbol Select Sector
YTD % Return 1-Yr % Return PowerRating
XLY Consumer Discretionary 4.20 2.06 5
XLP Consumer Staples 2.88 5.25 5
XLE Energy 6.64 25.12 5
XLF Financials 4.52 15.77 5
XLV Health Care 3.15 11.54 5
XLI Industrials 7.54 12.00 5
XLB Materials 6.31 6.32 5
XLK Technology 5.79 13.81 5
XLU Utilities 2.42 12.64 5

Compare those numbers to the S&P 500, which has a 5.06% return
year-to-date and 11.89% 1-year return. Four sectors are outperforming the S&P
500 so far this year (Energy, Industrials, Materials and Technology) and five
sectors are outperforming over the past year (Energy, Financials, Industrials,
Technology and Utilities).

These numbers show long-term performance, whereas PowerRatings is a short-term
trading tool. That means by using PowerRatings you can focus on the best sectors
at precisely the time they have a high probability of outperforming the S&P 500.

Click here
to take a free trial of PowerRatings.

You can also
attend a free
on how to use PowerRatings
presented by Steve Primo, TradingMarkets Director of Education.