Sector Rotation Definition and Strategies

What Is Sector Rotation?

By Matthew DiLallo – Updated Feb 22, 2025 at 9:14 AM

Key Points

Sector rotations occur when investors shift funds across industries in reaction to economic cycles.
During an economic contraction, money moves from cyclicals like tech to staples and utilities.
In the stock market's accumulation phase, investors tend to buy value stocks, shifting to growth stocks in the mark-up phase.

Investors tend to have a herd mentality. They'll move in a uniform direction following a particular strategy.

Sector rotation is when investors move their investment capital in unison from one industry to another as they anticipate a change in the cycle. Here's a closer look at sector rotation and strategies investors can use to capitalize on its occurrence.

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People looking at stock market screens. — Image source: Getty Images.

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Market cycles

The stock market also runs through a four-phased cycle like the global economy. These phases are:

The accumulation phase: This phase occurs at the bottom of a bear market. Investors begin to accumulate stock positions at what they view as attractive valuations. While the overall market sentiment is bearish, it's starting to shift from negative to neutral.
The mark-up phase: The mark-up stage is also known as a bull market. This stage follows a period of relative calm in the market, with stocks steadily moving higher. The sentiment is increasingly positive, causing more investors to pile in and resulting in increasingly higher stock prices.
The distribution phase: Traders who accumulated positions at more attractive valuations in earlier stages begin selling during the distribution phase as stock prices gain momentum. Stock prices often settle into a trading pattern, causing mixed sentiment among investors. The distribution phase occurs as the bull market runs out of steam and forms a market top.
The mark-down phase: The mark-down phase is also known as a bear market. Stock prices decline sharply as investors cycle out of stocks.

An example of a stock market cycle occurred following the Great Recession of 2008. The market bottomed in March 2009, which began the accumulation phase of the next cycle. The mark-up phase continued for several years before hitting the distribution stage in early 2020 as the COVID-19 pandemic roiled the stock market. A deep mark-down phase followed as stock prices plunged. However, by April 2020, the market bottomed, starting another accumulation phase.

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Oversold and overbought cycles

Overbought and oversold are technical terms referring to phases where the market experiences a significant and consistent swing in one direction. An overbought market occurs when stocks — either as a whole or in a particular sector — move higher over an extended period without a notable pullback in prices. Conversely, an oversold market happens when stocks steadily decline without a rally. These terms suggest the market is due to reverse the current trend, causing investors to rotate into or out of an investment class or sector.

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About the Author

Matt DiLallo has been a contributing Motley Fool stock market analyst specializing in covering dividend-paying companies, particularly in the energy and REIT sectors, since 2012. He also covers pre-IPO companies, ETFs, and other investing topics. He holds an MBA from Liberty University.

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