As growth equity managers, our edge isn't just in picking great companies, it’s in being in the right neighborhood at the right time. You can own the best, run software company in the world, but if the "big money" is rotating into Energy or Industrials, your stock will likely swim against a powerful current.
In our long, short strategy, Sector Rotation is the ultimate signal. It tells us where institutional liquidity, the "money flow," is concentrating. For a manager focused on relative strength and trend following, ignoring rotation is like trying to sail without checking the wind.
Market leadership is rarely static. It moves in cycles, often dictated by the broader economic backdrop, interest rates, and earnings shifts. When we track Relative Strength (RS), we are essentially looking for the "footprints" of institutional buying.
When money flows into a sector, it creates a "rising tide" effect. Stocks within that group begin to exhibit higher lows and tighter consolidations, the classic "coiled spring" setups we look for. Conversely, when a sector falls out of favor, even positive earnings beats can be met with selling as institutions use the liquidity to exit and rotate elsewhere.
The Power of the Sidelines: Cash is a Position
Perhaps the most overlooked aspect of following the money is knowing when the money isn't flowing into anything that fits your criteria. As a growth manager, your goal is to capture the meat of a move, not to force activity in a vacuum.
If the current sector rotation is moving into areas that don't meet your strict strategy requirements, doing nothing is not only fine, it is a professional necessity. Cash is a position. Sitting in cash is a strategic choice that preserves your "dry powder" and mental capital for when the true leadership emerges. There is no prize for being the most active trader in a low, probability environment, the prize goes to the one who is most aggressive when the criteria are finally met.
Relative Strength as a Compass
Following the money doesn't mean chasing yesterday’s winners. It means using relative strength to identify the emerging leaders.
The Leading Edge: We look for sectors that hold up best when the broad Nasdaq is in a "choppy" phase. If the index is down 10% but a specific group like Cybersecurity or Biotech is flat, that is a massive tell.
The Shakeout: Rotation often begins with a "shakeout" in the previous leaders. As the "Magnificent Seven" or heavy, weight tech names pause, we watch where that sidelined capital lands. Is it flowing into small, cap growth? Is it moving toward "Old Economy" industrials?
Risk Management and Rotation
For a growth manager, understanding rotation is a primary risk management tool.
Avoiding the Value Trap: By following the trend, we avoid "bottom fishing" in sectors that the market is actively abandoning.
Concentration Awareness: Rotation tells us if our portfolio is too heavily skewed toward a single theme. If 80% of our longs are in one sector and that sector begins to lose relative strength, our "stop losses" aren't just at the stock level, they are at the sector level.
The Bottom Line
At Worch Capital, we don't argue with the tape. If the money is moving, we move with it. If the money is hiding, we wait. Trend following is about humility, acknowledging that the collective intelligence of the market (the money flow) is more powerful than any individual thesis.
Whether it’s the AI, driven infrastructure boom or a pivot toward defensive growth, our job is to stay where the strength is. We don't just follow stocks, we follow the capital.