Sector Rotation on the CMT Exam
Sector rotation analysis is a practical application of relative strength and intermarket analysis that connects business cycles to sector performance. It is tested on CMT Level 2 and heavily in Level 3 essays.
For the full guide, see the CMT Exam Guide 2026.
The Business Cycle Rotation Model
Sam Stovall's sector rotation model maps sectors to business cycle phases:
Early Expansion (Recovery)
- Leaders: Financials, Consumer Discretionary, Technology
- Laggards: Utilities, Consumer Staples
- Macro: Interest rates low, employment improving
- Breadth expands; sentiment transitioning from fear to skepticism
Mid-Expansion (Growth)
- Leaders: Technology, Industrials, Materials
- Laggards: Energy, Utilities
- Macro: GDP accelerating, corporate profits growing
Late Expansion (Overheating)
- Leaders: Energy, Materials, Industrials
- Laggards: Technology, Financials
- Macro: Inflation rising, rates peaking
- Volatility begins increasing
Contraction (Recession)
- Leaders: Utilities, Healthcare, Consumer Staples
- Laggards: Financials, Consumer Discretionary
- Macro: GDP contracting, rates declining
- Defensive sectors outperform cyclicals
Cyclical vs. Defensive Sectors
| Type | Sectors | When to Overweight |
|---|---|---|
| Cyclical | Tech, Discretionary, Financials, Industrials, Materials | Expansion |
| Defensive | Utilities, Healthcare, Staples | Contraction |
| Interest-Rate Sensitive | Financials, REITs, Utilities | Depends on rate direction |
| Inflation Beneficiaries | Energy, Materials, REITs | Rising inflation |
Applying Relative Strength to Sector Rotation
Use comparative relative strength to identify which sectors are rotating into leadership:
- Calculate each sector's RS vs. the broad market (S&P 500)
- Rank sectors by RS momentum (rate of change of RS)
- Overweight sectors with improving RS; underweight weakening RS
- Confirm with volume and breadth analysis
Integration with Technical Analysis
Sector rotation combines with:
- Chart patterns for sector entry timing
- Moving averages for trend confirmation within sectors
- Fibonacci for sector price targets
- Portfolio management for allocation decisions
Practical Portfolio Application
For CMT Level 3 essays:
- Identify the current market cycle phase
- Select sectors aligned with that phase
- Rank candidates within sectors using RS
- Apply position sizing and risk management
- Monitor for rotation signals and adjust
Practice sector rotation questions in our test bank. Full guide: CMT Exam 2026.
Sector Performance by Business Cycle Phase
Average excess return vs. S&P 500 during each economic phase
Cyclical vs. Defensive Sector Characteristics
Scores across key attributes (higher = more of that attribute)