The Sector Rotation Model is an attempt to integrate fundamental approach into a technical indicator. It is based on a premise that macroeconomic sectors behave differently in certain phases of uptrend and downtrend.
This behavior was described by Giorgos E. Siligardos in his article "Applying the Sector Rotation Model" with eight sectors being taken into account: financials, discretionary, industrials, raw materials, energy, staples, health care, and utilities. Financials and discretionary are believed to lead the emerging bullish market and industrials take the leadership once the bullish trend is established. Raw materials and energy outperform other sectors at the end of trend while staples, health care, and utilities are the top performers in the downtrend.
In order to implement these rules, Sector Rotation Model uses the following indexes: XLY for consumer discretionary, XLF for financials, XLE for energy, XLP for staples, and XLU for utilities. For each of these, the rate of change of the Close price is found. The bullish component is then equal to the sum of values calculated for XLY and XLF, divided by two, and the bearish component is equal to the sum of values calculated for XLE, XLU, and XLP, divided by three. The resulting plot is the difference between the bullish and bearish components multiplied by 100. Parts of plot above the zero line are colored green which signifies uptrend, and those below zero colored red which conforms to downtrend conditions.
||The number of bars with which the rates of change are calculated.|
||The Sector Rotation Model plot.|
||The zero level.|
1. "Applying the Sector Rotation Model" by Giorgos E. Siligardos. Technical Analysis of Stocks & Commodities, August 2012.
*For illustrative purposes only. Not a recommendation of a specific security or investment strategy.