Sector Timing for
Conservative Market Timers
The current markets are as volatile as any seen since
the 2008 bear market chopped more than 50% off the major
indexes. We may not have a bear market in our immediate
future, but knowing that individual sectors will exit in
time to protect us is important.
Volatility is great if it is within a trend, and it often precedes a new trend,
causing unnecessary anxiety in inexperienced market timers. But volatility is
also needed to profit, something that many market timers forget.
There is one strategy that is hardly affected by the volatility,
and it is also quite profitable, year after year. For those
who are conservative market timers, we suggest the Fibtimer
Trading the Sectors
How does a market timer take advantage of volatility,
while protecting himself or herself from the very real
risks such volatility creates?
The answer is by trading the sector funds. Here is a "quick" list
of reasons why:
1. Diversification: By having small positions
in multiple industries, you reduce exposure to any single
industry being affected by a negative news event.
2. Volatility: While individual sectors are no
less volatile than the rest of the market, they do not
move together. So the volatility to one's portfolio is
3. Drawdowns: Because sector funds go to cash
during sell signals, and because there are always some
funds in bull markets at the same time there are others
in bear markets (during which those sectors are protected
in money market funds), drawdowns are kept to a minimum.
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4. Good in All Markets: There are always single
industries in their own bull markets. Even during a cyclical
bear market, such as we experienced during 2008, there
were always some industries moving higher. And if not,
you are still protected by being in money market funds.
5. Active Timing: Though sector timing is not
aggressive, it is certainly active. You will always be
trading the bullish sectors, and exiting the under performing
ones. In some respects, it is the equivalent of running
your own well managed mutual fund.
6. Trends: Industry sectors tend to trend. And
when they trend, they often move further (in either direction)
than anyone expects. During a strong bull run, it is
common to find individual sectors that double the gains
of the overall market.
Winning The Battle
The Fibtimer Sector Timer strategy covers 16 industry specific sector funds found
in the Rydex Fund Family. Several other widely used fund families also have sector
funds, including Pro Funds and Fidelity Funds which can be used with our sector
Even in volatile market conditions the Sector Timer strategy performs exceptionally
well. This is proactive money management at its best. Constantly putting your
money in the strongest sectors while removing it from the weakest sectors during
This is where the diversity inherent in sector timing stands out. Top performing
sectors are where your timing funds are allocated, and no one sector can cause
irretrievable damage to the portfolio should that industry collapse without warning.
But most importantly, as a portfolio strategy, sector timing has been winning
the battle against a stock market that has gained little in the past ten years
for buy-and-hold investors.
Over the years, sector fund timing may go down as the "best conservative strategy" because
of its ability to target funds into "only" those industry sectors which are performing
The low drawdowns, low volatility and diversification inherent in sector timing,
not to mention strong profitability, cause this strategy to stand out from all
In volatile market conditions sector timing can create profits while other traders
are watching their capital evaporate.
While sector timing may not make huge gains during cyclical bear markets, being
mostly in cash, the strategy will protect your investment capital. And it will
then perform well during bull markets, always keeping you invested in those industries
that are in their own bull markets.
Caveat... sector timing does require active participation. Perhaps we should
say it is for "active conservative market timers." The Fibtimer Sector Timer
often makes several changes each month though the number of changes is much smaller
during bull or bear markets when trends are strong.
Sector timing also requires a minimum account size.
Remember, there "could" be as many as 16 open positions
at any one time, and closed (bearish) positions should
be in cash (money market funds) with those funds remaining
untouched. A good guess is that a sector timing portfolio
should be at least $25,000 to start.
A new market timer could select seven or eight of the
major sectors and create a smaller portfolio. For example;
Consumer Products, Energy, Financial Services, Health
Care, Leisure, Retailing, Technology and Utilities.
The Fibtimer Sector Timer only requires a couple of minutes a day to check
for and make changes if they are needed. And we email those changes every evening
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Disclaimer: The financial markets are risky. Investing is
risky. Past performance does not guarantee future performance.
The foregoing has been prepared solely for informational
purposes and is not a solicitation, or an offer to buy or
sell any security. Opinions are based on historical research
and data believed reliable, but there is no guarantee that
future results will be profitable.