Sector Rotation and Relative Strength: How a Retail Investor Uses Sector Strength to Filter Buys and Cap Concentration

Relative strength asks whether a stock or a sector has gained more or less than its market index over the same window; sector rotation is that excess return moving from one sector to the next. A retail investor can use both without a model: accept buy signals only inside strong sectors, park the same signals when they appear in weak sectors, and cap how much of the portfolio any one sector can hold so six stocks do not quietly become one bet.

Key takeaways

• Relative strength = a stock's or sector's return minus its benchmark's return over the same window, in percentage points. It is not RSI.
• A breakout inside a strong sector has the whole sector's money behind it; a breakout inside a weak sector is one stock fighting the flow alone.
• Read a sector table across several windows and check breadth, not one return figure.
• Five stocks in one sector is one bet, not five. A per-sector cap (say 30%) matters more than picking a sixth name.
• The Stock Compass Sectors page shows sector strength, breadth and your holdings mix; sector strength is not a rule indicator, so that step is yours when choosing which signals to act on.

What relative strength is, and what it is not

Relative strength (RS): over one window, the stock's (or sector's) return minus the benchmark's return. Hong Kong stocks are measured against the HSI, mainland A-shares against the CSI 300, US stocks against the S&P 500.

Two examples pointing opposite ways. Over the past month a stock rose 4% while the HSI rose 6%: RS = −2 points, up but lagging. A sector fell 2% while the HSI fell 6%: RS = +4 points, down but holding up better. RS does not answer "did it rise?" It answers "where is the money going?"

It is unrelated to RSI. RSI is a 0–100 oscillator that measures how hard a single stock has moved recently. One compares a stock with itself; the other compares it with the market. See the glossary entry for relative strength.

Why breakouts in strong sectors tend to be higher quality

A breakout is price escaping its recent range, and holding above it needs buyers to keep showing up. Where those buyers come from decides how far it travels. When a sector is strong, the buying has a sector-level source: funds allocating to the industry, peer earnings improving, a theme being traded repeatedly. When one stock breaks out, most peers are already trending up and a pullback is caught by demand for the whole group. A breakout in a weak sector is one stock moving against the industry's money flow, and it has to earn every further step alone.

This does not mean weak-sector breakouts always fail. It means the same signal starts from different conditions, and limited capital should go to the better-conditioned set first. That is a logical argument, not a statistical promise; to test it, run the 20-day breakout strategy on names in strong sectors and again on names in weak sectors, and compare.

How to read a sector strength table

The columns below are the ones on the Stock Compass Sectors page; the figures are illustrative.

• Strength (1–10): a composite. It starts at 5, adds or subtracts up to 2 points for the 3-month return versus the benchmark, up to 1.5 for the share of members above their 50-day average, and 1 for the 1-month return. 7 and above is flagged strong, below 4 weak.
• Window return: the equal-weighted average return of members, switchable from 1W to YTD, default 3M.
• vs benchmark: relative strength itself, sector return minus the benchmark over the same window.
• Breadth (>MA20, >MA50): the share of members above their 20-day and 50-day averages. This column matters most: up 18% with 30% breadth is two or three heavyweights carrying the basket; 72% means the whole sector is moving.
• 60d Hi / Lo: how many members made a 60-day high or low, a second confirmation of breadth.

In practice: sort by 3M to see who leads, check 1W and 1M for whether the lead is still extending, then use breadth to tell a broad move from a few names carrying an average.

How rotation shows up in the table

Rotation does not announce itself on one day. Its trace is columns pointing in different directions.

A fading leader: 3M return still ranks first, but 1W and 1M have turned negative; >MA20 has dropped below >MA50; 60-day new highs have shrunk from 9 to 2. The score may still read 7 or more, but the margin has changed.

A sector taking over: 3M return still negative, but 1M has turned positive; >MA20 has jumped from 20% to above 50% while >MA50 lags near 30%; 60-day new lows have gone to zero. The score may sit at 4 or 5, mid-table, but the direction is up.

The right response is to redirect new buys, not to move the whole portfolio: existing positions follow your exit rules, new signals come first from the sector taking over. Weekly checks are enough.

Concentration: five stocks, one bet

Same-sector stocks rise and fall together on most days. Five semiconductor names diversify away single-company blow-ups, but industry cycle, policy and sector outflows hit all five at once. Diversification is measured by sector weight, not by counting names.

A simple cap rule: no single sector above 30% of cost. Stock Compass warns at 40%; you can hold yourself to a tighter line. A full example: a portfolio with total cost of HKD 100,000 in six positions.

The three semiconductor names total HKD 42,000, or 42%, and the Sectors page shows "Single sector Semiconductors is 42.0% of portfolio (target ≤ 40%)." That is not a sell signal. It says four-tenths of this portfolio's movement is decided by one industry. If the sector pulls back 15%, A, B and C most likely fall together, and that one theme alone costs the portfolio 6.3%.

Under a 30% cap there are two fixes, with different numbers:

1. Trim and redeploy. Sell HKD 12,000 of semiconductors (close C, or shave A, B and C) and put it into another sector scoring 7 or higher. Semiconductors become 30,000 / 100,000 = 30%, exactly on the line.
2. Trim and hold cash. The Sectors page measures share of holding cost, and cash is not a holding. After the same 12,000 sale, semiconductors read 30,000 / 88,000 = 34.1%, still above 30% on the page. To reach 30% by the page's measure you need to sell about HKD 17,200: (42,000 − 17,200) ÷ (100,000 − 17,200) ≈ 29.9%.

Either definition works; pick one and use it consistently. Trim the name with the worst relative strength, not the one with the biggest gain. For how position size and sector caps fit together, see position sizing and risk per trade.

How to use this in Stock Compass

The Sectors page. "Sectors" in the navigation bar, one page per market, with a 1W to YTD window toggle that defaults to 3M. When logged in, a "Your Holdings by Sector" block shows each sector's share of cost, number of names and current strength score, and a concentration warning appears when one sector reaches 40% of holdings or one stock reaches 25%.

The sector filter on Dashboard and Watchlist. Both pages carry a multi-select row of sector chips at the top. Once the Sectors page has given you two or three strong sectors, tick only those on the Dashboard and the buy signals you see are limited to them.

What the rules can express. Strategy rules include market-level indicators such as the index versus its 50-day average (market_index_vs_ma50_pct) and the 5-day index return (market_index_return_5d). Per-sector strength is not a rule indicator. Rules filter the market regime; filtering the sector regime is the manual step you take on the signal list with the chips.

A breakout strategy with a market-regime filter: a 20-day breakout is accepted only when the index is above its 50-day average and has not dropped sharply over the past five sessions, with volume confirmation.

{
  "name": "Breakout in a strong market (sector filtered by me)",
  "market": "hk",
  "rules": {
    "buy": {
      "v": 2,
      "outerOp": "OR",
      "groups": [
        {
          "innerOp": "AND",
          "conditions": [
            { "indicator": "is_20d_breakout", "operator": "==", "value": 1 },
            { "indicator": "vol_vs_avg20d", "operator": ">", "value": 1.5 },
            { "indicator": "market_index_vs_ma50_pct", "operator": ">", "value": 0 },
            { "indicator": "market_index_return_5d", "operator": ">", "value": -3 }
          ]
        }
      ]
    },
    "add": { "v": 2, "outerOp": "OR", "groups": [] },
    "trim": { "v": 2, "outerOp": "OR", "groups": [] },
    "exit": {
      "v": 2,
      "outerOp": "OR",
      "groups": [
        { "innerOp": "AND", "conditions": [ { "indicator": "floating_loss_pct", "operator": ">", "value": 7 } ] },
        { "innerOp": "AND", "conditions": [ { "indicator": "is_20d_breakdown", "operator": "==", "value": 1 } ] }
      ]
    }
  }
}

Run this, narrow the signals to strong sectors with the chips, and you have the whole workflow. Stock Compass does not connect to a broker or place orders; the signal list is your own rules scanned across your own watchlist, and whether to buy remains your decision.

Common mistakes

• Treating RSI as relative strength. RSI at 70 says the stock itself has risen a lot recently, nothing about whether it beat the index.
• Chasing the top sector on 3-month return alone. Skipping 1W, 1M and breadth often means entering at the tail of a rotation.
• Counting names instead of weight for the sector cap. Three same-sector names at 14% each carry the same risk as one name at 42%.
• Reading the concentration warning as a sell signal. It flags weight, not direction. The correct move is to trim back inside your cap.
• Moving the whole portfolio when you spot rotation. Let exit rules handle old positions and only redirect new buys.

Summary

Relative strength compares a stock with the market, not with itself; sector rotation is that comparison shifting between sectors. Find the sectors where breadth and return lead together, accept your own rules' buy signals only inside them, and cap any single sector near 30% so a few stocks never quietly become one bet. In Stock Compass, the Sectors page handles strength, the sector chips narrow the signals, market-index indicators go into the rules, and the sector step stays with you.