Sector Rotation and the CEO Strategy – January 8, 2024
In 2023, BCI introduced the CEO Strategy, a streamlined approach to covered call writing using the Select Sector SPDRs. This article will explain why sector rotation in our business cycle will create opportunities for this strategy to beat the market on a consistent basis. First, some definitions.
What is the CEO Strategy?
This is an acronym for Combining Exchange-Traded Funds with Stock Options. The database of over 8000 securities is reduced to 11 and the number of exit strategies available for covered call writing is reduced from 14 to 4. Each month or week, we select the top 4 or 5 to populate our covered call writing portfolios.
What are the Select Sector SPDRs?
These are exchange-traded funds (ETFs) that divided the S&P 500 into 11 index funds and managed with the objective of matching the price and yield performance of their underlying sector indexes. Historically, these sectors will out- or under-perform depending on the stage of the current business cycle in our economy.
What is the business cycle?
Fluctuations in Gross Domestic Product (GDP) explain the expansion and contraction of economic activity that an economy experiences over time.
Top-performing Select Sector SPDRs during each phase of the business cycle reflecting sector rotation
Recession:
- XLP: Consumer staples
- XLU: Utilities
- XLV: Health Care
Recovery:
- XLRE: Real Estate
- XLY: Consumer Discretionary
- XLB: Materials
Expansion:
- XLK: Technology
- XLF: Financials
- XLRE: Real Estate
Slowdown:
- XLV: Health Care
- XLP: Consumer Staples
- XLF: Financials
Discussion
Selecting our best performing Select Sector SPDR ETFs each week or month allows our portfolios to become populated with securities that align with the current business cycle. Although there are no guarantees, this does enhance our opportunities to beat the market on a consistent basis especially while we lower our cost-basis when selling covered call options.
Author: Alan Ellman