How Traders Are Using Sector Rotation to Plan Trades

Active traders and investment managers alike often turn to asset allocation strategies to try and outperform the broad market while minimizing downside risk. The number of methods used to determine what sectors to buy and their respective weightings are even more numerous, as there are investments to choose from. In this article, we'll take a closer look at a niche exchange-traded fund (ETF) that utilizes a sector rotation approach and try to determine where traders are likely to allocate their capital over the days and weeks ahead.

SPDR SSGA US Sector Rotation ETF (XLSR)

Based on the chart of the SPDR SSGA US Sector Rotation ETF (XLSR) shown below, it appears as though active traders who utilize sector rotation as the basis of their strategy could be poised to profit from a long-term move higher.

More specifically, followers of technical analysis will most likely look to the bullish crossover between the 50-day and 200-day moving average (shown by the blue circle) as a sign that the next leg of a major uptrend is just getting underway. Based on the combined support near $32, many traders will likely look to enter a position as closer to current levels as possible and place stop-loss orders below one of the illustrated support levels, depending on risk tolerance and outlook.

Technology

As much of the landscape of work and leisure have become digital in nature, the role of technology in today's society has never been more clear. Over the past several months, technology has been the top sector of interest for most active traders and also represents the sector with the highest weighting in the XLSR ETF. Many traders will likely look to ETFs such as the Technology Select Sector SPDR Fund (XLK) for ideas of where prices could be headed over the weeks ahead.

As you can see below, the price has recently surpassed the 2020 highs set in February, and recent price action suggests that the bulls are in control of the momentum and that prices could be poised to make a move higher. From a risk-management perspective, stop-loss orders will be set below one of the dotted trendlines, 50-day moving average, or 200-day moving average depending on risk tolerance and outlook.

Consumer Discretionary

Companies that benefit from the spending of discretionary income seem to be of specific interest to traders in today's market, as illustrated by the chart of the Consumer Discretionary Select Sector SPDR Fund (XLY). Active traders will want to make note that the 50-day moving average has recently crossed above the 200-day moving average (shown by the blue) circle, which is commonly used by followers of technical analysis to mark the beginning of a long-term uptrend.

The bullish crossover combined with recent price action near the dotted trendline suggests that the bulls are in control of the momentum. Stop-loss orders will most likely be placed below the trendline, 50-day moving average, or 200-day moving average in case of a sudden shift in market sentiment.

The Bottom Line

Traders who are unsure of where to allocate capital could be well served to explore sector rotation strategies. Based on the chart of XLSR, it appears as though prices are set to make a long-term move higher and that technology and consumer discretionary could be the sectors that lead the way.

At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.