Links Selecting sectors for maximum reward. Why Sector Rotation Works Economists, investment professionals and experienced individual investors have known for a long time that the market, like the economy, is divided into numerous industry sectors. We also know from experience that the economic activity and stock prices of these industry sectors move independent of other sectors and often independent of the market itself. It is a simple matter to take advantage of these unique and often divergent price movements.
Market prices move based on supply and demand.
Supply and demand for specific stocks within the market reflects the discounted expected future income stream of the companies issuing the stock. What makes this a horse race is that every analyst has his or her own estimate for that income stream. When an analyst makes an estimate, among the factors that are looked at are numerous items related to the industry the stock is in. Industry factors generally affect all the stocks in that industry. If stocks within an industry move together, then a mutual fund specializing in that industry will also move with the industry.