Vivek Bajaj How to Trade/Invest using

CA, CS, MBA (IIM Indore)

Sector Rotation Theory ?
 • What is Liquidity
• What is Sector Rotation
Agenda • Factors Affecting the Sector Movements
• How to Measure the Sector Strength/Weakness
• How to identity Right Stock to Trade/Invest in a Sector
• What should be the Exit Strategy
Parties in an Economic Cycle
Households/Consumers Businesses Government

• Principal • Producer of Good and • Printing Money

Consumption Driver Services • Stabilising Economy
due to Lifestyle • Utiliser of Resources by maintaining a
Changes • Capital Allocator and balance between
• Demand Generator Wealth Creator Inflation and Interest
and supplier of Rates
Labour and Capital • Collecting Taxes and
provider redistributing the
same
How does the Liquidity Cycle Work?
Consumption leads to Government Prints
Government Print
1 Money to balance the
prices in economy 6
increase in price if
supply of resources
are at constrain
Money/Adds Liquidity
to Stimulate Demand
(Ventilator)
1
Mass Wealth
Money goes to
Income and Wealth Destruction leading
2 Businesses to
Produce Good and
Services
5 gets converted into
Consumption
to unemployment
problems and fall in
demand

Savings get
Businesses will give This is Stage where
3 money to Households
as salary and savings 4 channelized into
Investment
generating additional
Asset Greed lead to
Bubble Formation
Key Factor driving liquidity : Interest Rates

Country GDP GDP YoY Interest rate Inflation rate

United States 21428 0.30% 0.25% 0.10%
China 14343 -6.80% 3.85% 2.50%
Euro Area 13336 -3.10% 0.00% 0.30%
Japan 5082 -1.70% -0.10% 0.10%
Germany 3846 -2.30% 0.00% 0.90%
India 2875 3.10% 4.00% 6.09%
United Kingdom 2827 -1.70% 0.10% 0.50%
France 2716 -5.00% 0.00% 0.10%
Italy 2001 -5.40% 0.00% -0.20%
Brazil 1840 -0.30% 2.25% 2.13%
Interest Rate Vs. Stock Market
India Story

?
 • Economic Cycle
Factors • Geo Political Actions
Effecting the • Innovations
Flow of • Special Events
Liquidity
No. of Sectors = 41
No. of Industries = 131
No. of Active Stocks = 5200
 • Economy moves in cycles and stock markets move
ahead of the economy.
• All sectors do not perform well at the same time.
Same is the case for stocks within a sector.
• Sam Stovall popularized the theory of sector
rotation through his work ‘Sector Investing’ and
Introduction ‘Standard & Poor’s Guide to Sector Investing’
Sector rotation in the Indian context

#Nifty Metal index data since availability

*FY21 returns till 8th July 2020
 • With increased globalization, many Indian
pharmaceutical companies gained significant market in
US/European markets. This led to a sharp growth in their
business during 2010-2015 and they behaved more like
growth stocks rather than defensives.
• Pvt Banking and Financial services sector performed well
in FY18 and FY19. On the other hand PSU banks have
Investment been very weak since long.
• There could be huge variation between the performance
Perspectives of one company in comparison to other in the same
sector. The idea is to invest in the better companies in
the out-performing sectors.
• The money flow into different sectors is a very useful
information. In the last one year, FIIs have pumped up
money into Insurance and household & personal
products space while they have been selling IT & Other
financial services
FII Flows – Top and bottom 5 sectors
What do you want ?

Invest Trade
 • Understanding of the Sector is very Important
Invest • Find Current Leaders in that sector
• Find Potential laggers
 • Finding sectors showing momentum
Trade • Entry and exit based on momentum
Key Theme Price
Parameters
to be used
for Study Volume Delivery
It’s a Race
for Money
Relative Strength Indicator
Formula
Relative Strength Index
Formula
Tools to be used
for Analysis
Investing
Steps

1 2 3
Find The Theme Find the Leaders Find Laggards
How to • Lots of Reading
Identify a • Track Delivery Data in SE
Theme • Use Combo Scans to find outlier Stocks
Trading
Steps

1 2 3
Track Sector Indices Find Strong and Find Strong/Weak
Weak Sector Stock and Trade
 RS 14 Period

Trade RSI 14 Period , Range 40

Template to 60
Take 6% as Target and
2% as Stop loss per trade
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