casemark/tracking-sector-rotation

Tracking Sector Rotation

Monitors sector performance rotation with factor exposure and macro sensitivity analysis.

When To Use

• Periodic (weekly/monthly) review of GICS sector relative performance to identify leadership transitions
• Evaluating whether current portfolio sector tilts align with observed rotation trends
• Assessing factor crowding risk when multiple sectors share dominant factor exposures
• Screening for early-stage rotation signals triggered by macro regime shifts (rate moves, credit spreads, PMI inflections)
• Preparing sector allocation input for investment committee or portfolio rebalance decisions

Inputs To Gather

• Sector return series: Total return data for each GICS sector (or custom sector schema) over trailing 1W, 1M, 3M, 6M, 12M windows
• Benchmark weights: Current sector weights in the reference index (e.g., S&P 500, MSCI World)
• Factor exposure data: Sector-level betas or loadings to standard factors — value, momentum, quality, size, volatility, growth
• Macro indicators: Recent readings and direction-of-change for key drivers — 10Y yield, USD index, ISM/PMI, credit spreads (IG/HY OAS), oil price, breakeven inflation
• Fund/portfolio positioning: Current sector over/underweights relative to benchmark
• Flow data (optional): ETF sector fund flows for demand signal confirmation

Workflow

1. Build the performance heatmap

   • Rank sectors by total return across each trailing window (1W through 12M)
   • Compute relative return vs. benchmark for each period
   • Flag sectors where short-term rank diverges sharply from long-term rank (potential rotation inflection)

2. Identify rotation pattern

   • Classify the current regime: early-cycle (cyclicals leading), mid-cycle (broadening), late-cycle (defensives firming), or contraction (utilities/staples outperforming)
   • Compare current leadership to the prior period — note which sectors are gaining/losing relative momentum
   • Tag any sector that has moved more than two rank positions in the last month as a "rotation candidate"

3. Analyze factor exposures

   • For each sector, report dominant factor tilts (e.g., Technology = high growth + momentum; Financials = high value + rate sensitivity)
   • Identify factor concentration risk: if leading sectors share the same factor (e.g., top 3 sectors all high-momentum), flag crowding concern
   • Note factor regime shifts — e.g., value-over-growth reversal, low-vol premium compression

4. Map macro sensitivities

   • For each sector, summarize directional sensitivity to key macro variables:
     • Rising rates: positive for Financials, negative for Utilities/REITs [VERIFY current beta estimates]
     • USD strength: negative for Materials/Energy exporters, mixed for Tech
     • Credit spread widening: negative for Financials/high-leverage sectors
     • PMI expansion: positive for Industrials, Materials, Consumer Discretionary
   • Highlight where macro direction-of-travel supports or contradicts the observed rotation

5. Assess portfolio implications

   • Compare current portfolio sector weights against the rotation thesis
   • Identify sectors where the portfolio is positioned against the trend (contrarian risk or opportunity)
   • Flag any sector where position size exceeds 2x benchmark weight as concentration risk

6. Synthesize and flag

   • Summarize the rotation narrative in 2-3 sentences (e.g., "Rotation from growth to value/cyclicals, consistent with early PMI recovery and steepening yield curve")
   • List actionable sector calls: overweight, underweight, or watch
   • Mark any data gaps, stale inputs, or conflicting signals with [VERIFY]

Output

The tracking report should include:

• Sector performance table: Returns by period with rank and rank-change columns
• Rotation signal summary: Current regime classification, direction of rotation, conviction level (high/medium/low)
• Factor exposure matrix: Sector-by-factor grid showing dominant loadings and any crowding flags
• Macro sensitivity map: Sector-by-macro-variable directional table with current macro stance noted
• Portfolio positioning gap: Table comparing portfolio weights vs. benchmark vs. rotation-implied tilts
• Action items: Specific sector over/underweight recommendations with supporting rationale
• Watch list: Sectors at inflection points requiring monitoring before action

Quality Checks

• Confirm all return data is from the same source and uses consistent total-return methodology (not price-only)
• Verify that sector classification (GICS vs. ICB vs. custom) is consistent across performance data and factor models
• Check that macro indicator readings are current (within 1 week for high-frequency data like PMI, within 1 day for rates/spreads)
• Ensure factor exposure data vintage matches the analysis date — stale factor betas from a different regime mislead
• Cross-check rotation signals against sector ETF flow data for confirmation; divergence between price momentum and flows warrants a [VERIFY] flag
• Validate that any regime classification is supported by at least two independent macro indicators, not a single data point
• Confirm portfolio weight data reflects actual current holdings, not model/target weights