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 II and heavily in Level III short answers.
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 III short answers:
- 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)