Q: My question is related with the way to handle short term sector rotation and relative strenght analysis.

Some sectors and industries are down sharply in the near past, but look strong when looking over 1 or 3 months.

Other sectors look strong in the near past, but show weakness when viewed over longer periods. How do you deal with this situation? Which are showing relative strenght and which are showing relative weakness?

A: The way I see it from your description is essentially this… you have a sector which was strong and is now in a correction.

And you have a sector that was weak and now is showing strength… this is the same scenario, where that sector is correcting the downtrend by showing strength.

From the sounds of these 2 scenarios we are looking at the same thing. As the corrections in both complete, and the trend reasserts itself, the strong market (currently weak) will begin to show strength again, and the weak market (currently strong) will continue with weakness.

The only way this will change is if these two markets are going through actual reversals, at which point (if they stay inversely co-related) the strong market will now get weak and vice-versa for the weak market.

In the end, it comes back to the same trading foundations… identifying a trend, a correction and a reversal; then formulating a plan to trade accordingly.

I would treat each market as separate trading decisions.

Categories: Trading

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