Momentum Monday – Bull Markets Often Correct Through Sector Rotation

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After a big run in January and the first half of February, the S&P 500 is consolidating in a tight range above its 200-day moving average. While some of the tech leaders are starting to lose upside momentum and the FANGs are treading water, there are quite a few other sectors that are stepping up to the plate. Biotech had a monster breakout last week and it is likely to remain the pond to fish for active traders in the next few weeks.

People are obsessed with catching bottoms and tops. One can understand the fascination with this market approach. It’s based on a mean-reversion, which is contrarian by nature and everyone wants to be a contrarian. It has the potential to deliver a reward multiple times bigger than the taken risk assuming you are willing to cut your losses quickly. It looks good in theory but it is too hard to implement in practice. In the long-term, playing against the established trend is a losing proposition for most market participants. Focusing on capturing parts of trends is a much more common-sense approach, which can deliver a lot better return with a lot less hassle over time.

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