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To follow one of your suggestions regarding sector rotation, I would like to construct a saved chart arrangement in Insight Trader of all of the GICS indices, to show the relative strength of each index.

I am going to be a bit pedantic about this aspect of your question. This is not to be clever, but to bring out some points that I believe are very important and not well understood.

Firstly, you refer to one of my suggestions. This could be just loose language, but I did not intend that my reference in The Aggressive Investor on page 59 to sector rotation was a suggestion. It was intended as no more than an interesting observation on the second phase of a bull market. What I said was:

Another interesting phenomenon will appear in this phase. This is called sector rotation. As its name suggests, different sectors in the market tend to take their turn in leading the advance, while the previous leading sectors tend to take a breather. Thus, banks will run upward for a while, then chemical manufacturers, then insurance companies, then retailers and so on.

So, I said it was an interesting phenomenon, not a suggestion. This is pedantic, but important. If it was a suggestion, it would be explicitly in my investment plan. As an interesting phenomenon, it is no more than one rough marker that is useful in reading where the market might be, and how it may be behaving, in the phases of the bull market.

Secondly, I used the word tend twice. This choice of word was very deliberate. Sector rotation is not something that can easily be measured objectively. It is no more than a general tendency and an inconsistent one at that. It requires years of reading and study of the financial press, analysts reports and company reports to develop the experience and judgement to recognise the various sectors and to know which companies fit into them. Also, some companies operate in multiple sectors. Moreover the activities of companies change over time. Finally, the sectors themselves change over time with technology and other changes in the economy. I used the word tend, because sector rotation is not an easily defined or measured concept and I do not have any evidence that it is well defined or can be easily measured using GICS indexes or any other sector charts.

Thirdly, GICS indexes are not indexes of single industry sectors. They indexes of very broad groupings of industries, each of which industries contain many industry sectors. They were originally set up for the US stock market and applied to Australia with only slight variations. The US stock market has a different structure to our market. I do not use them, because they are so broad and also because I am a bottom-up analyst or stock picker, rather than a mechanical top-down analyst. Above all, remember why these indexes are produced. The ASX sold out to S&P, who produce indexes that funds managers can use as benchmarks based, not on industry sectors, but on broad industry groupings. They are therefore not optimised tools to measure the market, though they are the best tools we have for that purpose. Think about the exclusion of News Corp as an example of the way they are twisted and distorted. I tend to only use the ASX All Ordinaries index, as it is the best broad measure of the market.

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