Concept
Sector Rotation Model
Sector Rotation Model, also known as risk-on/risk-off pairs: HYG/TLT, XLY/XLP, copper/gold, is a Breadth, Sentiment & External Data concept. The Library holds 1 implementations, each one a working definition you can pull into Quant.
Top Sector Rotation Model indicators
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What is a Sector Rotation Model?
A sector rotation model is a framework that reads market regime through which sectors are leading. The classic business-cycle version holds that leadership rotates in a rough sequence: cyclicals such as consumer discretionary and financials tend to lead early in an expansion, energy and materials later in it, and defensives such as staples, utilities, and healthcare as growth rolls over. Rather than forecasting the economy directly, the model infers the phase from relative performance, usually measured with ratio charts of each sector against the broad index.
A related, faster reading uses risk-on/risk-off pairs: consumer discretionary versus staples, high-yield bonds versus Treasuries, or copper versus gold. When the risk-seeking side of these ratios is rising, participants are rewarding risk; when the defensive side leads, they are paying up for safety. Both versions are tendencies drawn from past cycles, not fixed laws, and leadership can be distorted by index concentration and secular themes.
How traders use it
- As a regime filter: risk-on pairs trending higher support treating index rallies as having genuine risk appetite behind them, while defensive leadership during a rally is a caution flag that money is rotating toward safety beneath the surface.
- To choose where to hunt for setups: rotation models favor sectors gaining relative strength against the benchmark, often visualized on relative rotation graphs, on the premise that leadership tends to persist through a cycle phase. Persistence is a tendency, not a rule.
- As a macro cross-check: sector leadership is paired with intermarket analysis (bonds, commodities, the dollar) to judge whether the equity rotation agrees with what other asset classes are pricing.
Related concepts · Relative strength & rotation
Concept family
Breadth, Sentiment & External Data
63 concepts mapped · 61 in the Library
Sector Rotation Model FAQ
What does defensive sector leadership mean for the market?
When staples, utilities, and healthcare outperform while the index rises, the common reading is late-cycle caution: money is staying invested but hiding in stable cash flows. That pattern has preceded some tops and merely accompanied consolidations in other cases, so most practitioners treat it as a reason to tighten risk rather than a standalone sell signal.
Which sectors lead in each phase of the business cycle?
The textbook sequence runs consumer discretionary and financials early in a recovery, industrials and technology through the middle, energy and materials late in the expansion, then staples, utilities, and healthcare through the contraction. Real cycles deviate from the template and sector composition shifts over time, so most users confirm with measured relative strength instead of assuming the calendar.
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