Sector allocation is a key driver of investment returns, and an understanding of and the ability to identify sector rotation patterns can deliver outperformance by anticipating shifts in sector appetite at an early stage.
It also affords managers and portfolio strategists a unique perspective on the cyclical progress of the overall market, facilitating timely changes in investment strategy, portfolio hedging or asset allocation as business conditions and the economy fundamentally evolve.
The Market Navigator Sector Heatmaps are designed to provide an intuitive framework for rapidly assessing and anticipating sector rotation patterns.
Heatmaps are a top-down market-by-sector analysis tool, where the 51 second tier sub-sectors under the 10 top levels sectors (see sector structure) are displayed in a unique visual format, providing color-coded and numerical ranking based on proprietary, value-added sector data generated by the MarketScalpel database
The total market is broken down by sub-sectors arranged in an upstream/downstream matrix designed to show industry value-added and/or vertical industry integration increasing from left to right and top to bottom (See analytics/Navigator demo).
Sub-sector segments are sized according to their contribution to the overall parent sector market cap, facilitating rapid assessment of the relative importance of shifts in sub-sector dynamics.
The precise placement of sub-sectors within the overall market matrix is to some extent subjective, but experience suggests that our arrangement works very well typically revealing clusters of emerging sector strength and/or weakness that spread or contract according to market dynamics.
Furthermore, the layout allows clients to easily evaluate the market along alternative lines such as cyclical/non-cyclical or discretionary/non-discretionary sectors, or to monitor key sectors such as Banks and Retail that typically lead the market (eg "Do Industries Lead the Stock Market?" Hong, Torous & Valankov, 2002).
The heatmap sub-sector matrix displays various key ranking metrics selected via the Display Option drop-down box in the Market Navigator control panel (see B in the controls overview):
The ability to quickly switch between alternative ranking metrics provides a highly intuitive framework for rapidly identifying existing and emerging sector leadership themes - both on the upside and downside - as a result gaining a superior strategic overview of sector rotation patterns as they develop.
Armed with an understanding of the progression of sector rotation patterns, clients can accordingly benefit for example by tactically tailoring sector allocation models, or positioning to take advantage of momentum or contrarian trades.
As is the case with our other main top-down analysis tool, the
Sector Overview Tables, Heatmaps can be
detached into a separate window by clicking 'Detach Body' in the control panel.
This separates the Heatmap into a new floating window but the link with the main windows remains intact, so when a subsector name is clicked in the detached window the main window will display the relevant Sector Chart or Stocks Table in the main browser window depending on the last tool - and if applicable chart option - selected.
In this way it is possible to quickly access qualitative information regarding sector leadership groups to rapidly assess whether leadership trends are sustainable, for example with reference to overbought/oversold data available via the Sector Internals Charts or the potential for long-term leadership trends to emerge or reverse via the Relative Strength Charts.