In Finance, what is a Group Rotation?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 06 February 2020
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Sometimes referred to as sector rotation, the concept of group rotation has two applications in financial circles. One application has to do with monitoring the activity of various market sectors as their performance changes in relation to other sectors. The idea is to observe how one sector rotates to a higher performance level when a different sector enters into a period of relatively low performance. The second application has to do with arranging the investment portfolio in a manner that takes advantage of these shifts or rotations between different market sectors.

As applied to observing market performance, group rotation is about identifying situations where the performance of one market sector increases when a different sector begins to decrease. Factors such as seasonality, or the ebb and flow of consumer demand sometimes cause one sector to increase while simultaneously depressing a different sector. For example, the stock of a company that makes swimsuits will increase as summer months draw near, while a company that makes heavy coats may see a decrease in demand during the same period. Later in the year, the coat company enjoys renewed vigor in the marketplace as the weather cools, while the demand for products made by the swimsuit company decrease until warmer weather returns.


This general idea of group rotation is very helpful for investors who wish to generate the highest return possible for the securities that make up the investment portfolio. Accurately reading economic cycles makes it easier to make smart choices when it comes to buying and selling stocks and other securities. Just as the demand for the products manufactured by different companies will rotate, the savvy investor can engage in rotating investments to take advantage of trends in the market.

By analyzing the performance of separate but related market sectors, it is possible to come up with a strategy to buy securities related to one sector, while selling securities related to the other sector. Timing this to coincide with the rotation taking place between the two sectors makes it possible to maximize the return, while at the same time minimizing the risk. By staying in touch with what is happening in the marketplace, it is possible to predict when the group rotation will occur again, and buy and sell stocks accordingly.

The practice of group rotation within an investment portfolio is relatively common. Assuming that the sectors under consideration are fairly predictable, it is possible for the investor to set up standing orders with a broker to buy and sell related stocks and securities on a rotating basis throughout the calendar year. It is always a good idea to review those orders prior to their execution, since some previously unforeseen factor may have arisen in the interim, making the purchase or sale less prudent.



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