Sector Rotation

[SugarMountain]

Has anyone investigated sector rotation based on the business cycle?  I did a search on "sector rotation" but it came up empty. (Here's a Fidelity paper on the topic: https://www.fidelity.com/webcontent/ap101883-markets_sectors-content/19.06.0/business_cycle/Business_Cycle_Sector_Approach_2019.pdf

tl;dr version: Basically, certain sectors (Information Tech, Real Estate, Industrials, Financials, etc) do better at different phases of the business cycle, so you create a portfolio distributed amongst the sectors and rotate in and out of them based on where we are in the business cycle (currently "late recovery" for about the last 7 years, lol).

I did get into a debate with a Fidelity advisor about whether this was trying to time the market or not, but that's a story for another day.  I did find some stuff online where this strategy was backtested to about 2000 with pretty good success.

On the surface it makes some sense to me if you can avoid getting killed on taxes, which is always a challenge with rebalancing a portfolio in a taxable account. 

[bacchi]

(currently "late recovery" for about the last 7 years, lol). 

This is the problem. Backtesting is useless if you have to make decisions with prognostication.

[CorpRaider]

Sounds like a pass for me, but I think RAFI or Invesco (or someone) offers a sector allocation fund using the CAPE and based on some of Shiller's research.

[habanero]

How long is a business cycle? When do you know its getting towards and end? We have been at the end of this cycle for quite some time now and you would likely have lost out on a lot of gains by assuming it was gonna end 2 or 3 years ago. I remember reading research about how to play the end of the cycle on our domestic market over here about 3 years and 40% market performance ago.

[MustacheAndaHalf]

I tried sector rotation based on momentum, but in my experiment I lost to the S&P 500 (the benchmark I used).  To be fair, the experiment changed partway through into any ETF with momentum, but that still fell through.

Before you try an experiment, though, you need a very clear definition.  How would you select sectors based on the business cycle?
There's probably a mutual fund that does something similar.

[harvestbook]

Isn't this what active managers are doing, and quite poorly despite all their genius, experience, and data?

[JAYSLOL]

Isn't this what active managers are doing, and quite poorly despite all their genius, experience, and data?

“Sector Rotation” is just another variation of broad market timing/speculation.  Hard pass.