Research · counted from the record
Do sector rotation maps work?
Rotation maps sort sectors into leading, weakening, lagging and improving. Since 2012, a sector newly entering the leading corner went on to beat Nifty over the next month 50% of the time, in 696 cases: a coin flip.
The tool
A relative rotation map plots each sector on two measures: how strong it has been against the index, and whether that strength is growing or fading. That gives four corners, and sectors tend to travel round them in order.
The map is a good picture of where strength is. It is usually presented as more than that: buy what is improving, hold what is leading, sell what is weakening.
How it was counted
Schema computes the map for 13 NSE sector indices against Nifty 50 for every week since 2012. Strength is the sector index divided by Nifty, set against its own 50-day average; momentum is the change in that over ten sessions. Both are smoothed over five days.
Each time a sector moves into a corner it was not in the week before, that is one case. Its return over the next 21 sessions is compared with Nifty's over the same days.
The map on each date uses only prices up to that date.
What followed each corner
| Sector entered | Cases | Beat Nifty the next month | Typical result against Nifty |
|---|---|---|---|
| Leading (strong and strengthening) | 696 | 50% | +0.05% |
| Weakening (strong but fading) | 564 | 49% | −0.05% |
| Lagging (weak and weakening) | 678 | 49% | −0.05% |
| Improving (weak but recovering) | 556 | 51% | +0.17% |
What it means
No corner of the map has predicted the next month. Whichever corner a sector enters, it has gone on to beat the index about half the time, by about nothing.
This does not make the map useless. It shows clearly which sectors have been strong and which are turning, and that is worth knowing when reading a market. It is a description of the recent past.
What the count does not support is using a sector's position on the map, by itself, to decide what to buy for the month ahead.
Limits
- The test is of this map's standard settings on sector indices. Other settings or longer holding periods might behave differently, and would need their own count.
- One month is a short horizon for a sector trend. The same count over three or six months has not been published here.
- Sector indices overlap (banks and financial services, for instance), so the cases are not fully independent.
Questions people ask
Do sector rotation charts work?
As a predictor of next month's relative return, no: since 2012, sectors entering the leading corner beat Nifty 50% of the time across 696 cases. As a picture of where strength is, they are useful.
What is a relative rotation graph (RRG)?
A chart that places each sector by its strength against a benchmark and by the momentum of that strength, giving four quadrants: leading, weakening, lagging and improving.
Which sectors are leading in India now?
Schema's Rotation page shows the current map for NSE's sector indices, with each one's path over thirteen weeks.
Is sector rotation a good strategy in India?
Rotation strategies need more than the map: a rule, a holding period and a test that counts costs. On its own, quadrant position has not predicted next month's relative return.
Keep reading
Research and information, not investment advice. Every figure describes the past: it is what happened, counted, and not a forecast of what will.