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Momentum based sector rotation strategies.

  • 1.  Momentum based sector rotation strategies.

    Posted 01-29-2023 12:48
    Hi ,

         I have been studying momentum-based sector rotation strategies. It's based on buying the top three performing S&P sectors once a month. To determine which are top performing I look at the previous two months data. A see which sectors have increased the most percentage wise over the last two months.
    These are the ones that seem to have momentum. You buy those according to their percentage increase. I have back tested this strategy starting from
    2007-02-26 thru this week. So, it includes the 2008, 2020, and 2022 bear markets and various taper tantrums. A S&P 500 index by and hold would give you a 
    total return of 192% to date. The rotation strategy would give 506% to date. This is with bailing to cash, gold, or uup during bear markets. For a bear market indicator I use a death cross/golden cross indicator combined with the trix indicator. Does anybody else have similar observations?

    [Jim] [McClean]

  • 2.  RE: Momentum based sector rotation strategies.

    Posted 01-29-2023 14:32
    Hi ,

      Uploaded some plots. S&P.png is plot of S&P 500 with 20 period double exponential average (weekly periods) and 100 Period double exponential average (weekly periods). This gives death cross and golden crosses. BullBear.png is a joint normalized trix plus death cross golden cross indicator for bullish bearish trends. Top3.png is current top three S&P sectors.

    [Jim] [McClean]

  • 3.  RE: Momentum based sector rotation strategies.

    Posted 02-05-2023 10:40
    Edited by PETER WANG 02-05-2023 10:50
    Hi Jim, I've never tried sector rotation within the US market. I rotate between US, ex-US, REIT, gold, commodities, bonds. I have a bit of a Frankenstein because of limited fund choices in different accounts, but broadly speaking:

    401(k) - Paul Novell's EM-COMP (derived from his SPY-COMP)
    SPY vs EM
    *** currently in EM ***

    Fidelity Charitable - Paul Novell's DM-COMP (derived from his SPY-COMP)
    VTI vs EFA
    *** currently in EFA ***

    Antonacci's Traditional Dual Momentum AKA "GEM"
    VTI vs VEU
    *** currently in AGG ***

    IRA - Keller's Bold Asset Allocation Aggressive
    QQQ vs EEM vs EFA vs AGG
    *** currently in EFA ***

    IRA - Keller & Keuning's Generalized Protective Momentum
    S&P 500 (represented by SPY), Nasdaq 100 (QQQ), Russell 2000 (IWM), Europe equities (VGK), Japan equities (EWJ), emerging market equities (EEM), US real estate (VNQ), commodities (PDBC), gold (GLD), US high yield bonds (HYG), US corporate bonds (LQD), long-term US Treasuries (TLT), and intermediate-term US Treasuries or Cash (crash protection assets)
    *** currently in EEM, GLD, PDBC ***

    These strategies have low cross-correlations so the backtest is phenomenal. 13% returns less than 10% drawdowns, even during the GFC... if you can focus on the entire thing over the long term and stick with it, and not get emotionally suckered by volatility and get off-course, you'll do well. Sequence of returns risk minimized... important because I want to retire in 3 years.

    I get the signals for about $1 per day from  I just trade end of month. Everything is extensively backtested, fully supported, it's as worry-free as possible. There is so much labor in creating these strategies, it's futile to try to build them myself from individual technical indicators. It would like trying to build and fly my own aircraft versus buying a ticket on United. There is a place for building your own aircraft, but just as a hobby, not for heavy-lift long-distance reliable safe and fast travel.

    AAII Houston TX Member

  • 4.  RE: Momentum based sector rotation strategies.

    Posted 02-05-2023 18:59

    Hi Peter,

       I am not familiar with . I wrote some programs in the Julia language to investigate the claims concerning momentum-based sector rotation being made by

    Sumgrow Their claims seem largely true. I will have to investigate AllocateSmartly.c om and compare them to Sumgrowth has lots of strategies both domestic and foreign. I just lo oked at sector rotation in the S&P sectors. Going to cash, gold, uup during bear markets. The programs I wrote pick the top two or three sectors during bull markets every month. Forward walking this automatically since 2006-01-30 I get a return of 7590% versus a S&P return of 226 %. Quite a difference. A lot of it comes from automatically avoiding bear markets. I cooked up a bull/bear oscillator using a combination of a normalized death cross golden cross indicator and the trix indicator. The strategy switches to safe assets during bear markets. I did not find that using market short eft's like "sh" helped. I have attached some plots of my programs output.

    <<...>> <<...>> <<...>> <<...>> <<...>> <<...>>

  • 5.  RE: Momentum based sector rotation strategies.

    Posted 02-06-2023 10:37
    Edited by PETER WANG 02-06-2023 10:37
    Yes, I have also noticed that adding SH during risk-off does not help --- it does maybe with perfect hindsight, but not in real-life or real price action historical backtests. I have used the market timing tools at Yes, death crosses and gold crosses are venerable trend indicators. They work. The issue is... how much data do you have to backtest the parameters on? How do you know that 100 period and 20 period is the best combo for all cases? If you don't have a dataset going back decades and decades, is it valid, or are you curve-fitting to too small a dataset?

    The AllocateSmartly people have monthly data going back to the early 1970s and daily data to 1989, which is pretty much impossible for little folk like us to get. 

    There's always the Advisor Perpectives charts which show the 10 and 12 month moving average technique working well during the Great Depression post-1929 crash. That's always encouraging. Scroll to the bottom of this page.

    When I go to Reddit to talk about technical analysis and trading in and out to reduce risk, I get downvoted and verbally abused. "No good deed goes unpunished". I can envision some chirpy confident young-ish person who started investing in 2009 at age 26, is now 40, has had the luck to be 100% SPY or QQQ the whole time and they now think they are like unto gods. They've never lived through a -50% haircut on SPY, or maybe -70% haircut on QQQ. They see no need for technical analysis, just buy and hold passive ETFs, and buy the dip, because the Fed will put QE into every dip.

    We shall see.

    AAII Houston TX Member

  • 6.  RE: Momentum based sector rotation strategies.

    Posted 02-18-2023 09:29

    Hi Peter I am new here but have over 35 years of trading and trade system development.  I would submit that technical analysis can generate alpha in the right circumstances.   Have you looked at using either a neural network or some other back testing of  your strategies ?  

    Thomas Wagner

  • 7.  RE: Momentum based sector rotation strategies.

    Posted 02-18-2023 15:21

    I'm not a content creator in this space, I'm just a user. I will say, though, I do have exerience with neural nets outside of finance, and they are no panacea. It's very easy to get yourself into an overfitting situation, where you get a perfect backtest but the model doesn't perform very well out-of-sample.

    AAII Houston TX Member

  • 8.  RE: Momentum based sector rotation strategies.

    Posted 02-18-2023 17:00

    Thomas, I think what you are referring to is to forward walk some trading strategy through historical data which hopefully includes various bear markets and comparing that to some benchmark. I would believe that both the "allocatesmartly" and "sumgrowth" companies do that with their defined strategies. It's probably true that you can over train neural networks so they do well on their training datasets, but not well otherwise. Most strategies that do well are based on some kind of momentum and avoidance of bear markets. I have been mucking about with a s&p sector rotation strategy with bear market avoidance and it gives me something in the low 30% annual return. The rotation strategy is simple its choosing the top 1 to 3 s&p sectors that have beat the S&P average in the last 2 months. The bear avoidance signal is based on a combination of the death cross/golden cross indicator and the trix indicator. I combined them into a oscillator. When in bear markets you switch into cash, gold, fld, uup amlp xlu depending on which has the best relative 2 month performance. It's pretty simple stuff I doubt its overfitted as it's simple minded. I also have been mucking about with a variety  of the dual momentum strategy except I look at a weighted average of the 1 month, quarterly, semi annual and annual relative performance. The weights are 4/10, 3/10, 2/10/ and 1/10 for the monthly, quarterly, semi annual, and annual relative performance. This is giving me annualized gains in the mid 20's. The above are inclusive of dividends, trading slippage, and a 20% annual tax rate.

    Both momentum strategies are simple minded. The dual momentum strategy does not have a explicit bear market indicator as a part of the strategy, but you go to a cash like instrument if nothing in the 8 assets classed are performing.

    [Jim] [McClean]

  • 9.  RE: Momentum based sector rotation strategies.

    Posted 02-18-2023 17:34
      |   view attached

    I have attached an interesting read concerning momentum.



    momentum.pdf   580 KB 1 version

  • 10.  RE: Momentum based sector rotation strategies.

    Posted 03-10-2023 13:57

    Howdy, James.

    I have been following this thread since it first appeared.

    The theories swapped here have spurred me to get better informed on technical analysis. So far, in about 2 months, I have read 2 books and downloaded 3 OL courses on TA and completed the assignments and passed all the tests. I am nowhere near competent at a novice level.

    Your interest in applying TA to identify sector momentum trends interests me. I hope you get a lot on responses to your request for insights.

    I have applied my meager TA level 1 knowledge to screen several dozen ETFs I am interested in, looking at trends, support/resistance levels, and searching for "clues" that might indicate a breakout pattern, writing down my observations and predictions, then checking my predictions to see how good I am at seeing pattens in TA "Rorschach" in the chats I have access to at several brokerages. Basic stuff. I am not ready to solo. yet. I don't trust that my "student" training will guarantee that I can keep the shiny side up on landing.

    I have a stake in your success. My basic investment strategy is to identify low ER (low cost), high AUM (high liquidity)  sector ETFs.

    I have found 2 sources of data I have found to be trustworthy, all at the same broker. (1) A Trader Outlook that updates sector performance trends weekly, and (2) a Monthly Outlook that addresses 5-8 trends/issues that are intended to link past data (usually in line chart format) to their analysis of current market trends.

    One recurring chart is a diagram of the performance of all 11 GICS sector indices updated monthly. The designer has chosen a very clever format. She displays the monthly performance data in a "quilt" format. Each sector is color-coded and then stack-ranked like a Totem pole for the month. Then she displays the last 12 months side-by-side so users can easily observe how the 11 sectors change relative to each other month-to-month. Each cell has its performance data. It is really a matrix that has been sorted dynamically MOM. It deserves to be in the Data Hall of Fame because all the information it provides in a compact format.

    Since this diagram is proprietary, I cannot copy it into this thread, but here is a link to the most recent version that discusses how many sectors' performance have inverted from 4Q22 to 1Q23.

    MOM changes appear to be completely random. No trends are observable in either the monthly quilts or the YOY quilts.

    These data lead me to estimate that whatever momentum trends may exist among the  sectors MOM and YOY are random because of the wide variations across time periods.

    This is all I can contribute.

    I hope someone has data that disproves my observation. After all, Karl Popper's Falsification Principle suggests that for a theory to be considered scientific, it must be able to be tested and conceivably be proven false. The hypothesis that "all swans are white" can be falsified by observing a black swan.



  • 11.  RE: Momentum based sector rotation strategies.

    Posted 03-10-2023 15:03

    Gary Antonacci did a study of industry sector relative momentum, and he found that it did not generate excess returns. Gary is the author of Dual Momentum

    All of the momentum strategies I see published on Allocate Smartly are not sector strategies... rather, they submit even larger asset classes to various relative and absolute momentum tests. The fastest and "twitchiest" strategies use 1, 3, 6, and 12 month momentum, some use 3, 6, 12, some use 6, some use 12. They almost universally trade one time per month, last trading day of the month... so it's not swing trading. They don't ever use a technical indicator that a computer cannot utilize in a hard quantitative manner. Any technical that requires human interpretation or guessing isn't useful for their purposes. Everything is back-tested to 1972 or so.

    Some examples of these large asset classes are: US large caps, US small caps, US value, US momentum, US REIT, Emerging Market, EAFE, Japan, Europe, 2 year T-Notes, 10 T-Notes, 30 T-Bonds, high yield bonds, investment grade corporates, T-Bills, gold, commodities. 

    AAII Houston TX Member

  • 12.  RE: Momentum based sector rotation strategies.

    Posted 03-10-2023 15:29

    Hi ,

        Momentum in anything does not last very long these days. There are lots of algo's ru nning all the time that would close any gap?

    Technical ly the bear market is just ending. So rotation strategies are in bear mark et symbols like:

    gld cash uup fdl xlu dhs pey vde amj gnr vpu tflo

    "cash" wo uld be something that yields 2% without principal loss. The above tickers showed positive gain in 2022. Also xle had positive gain in 2022 as well.

    So there would be no rotation amongst s&p sectors for the most part at this time.

    Also momentum does not really persist very long. Perhaps about 2 months. Mostly I suspect because there are lots of algo's running all the time that c lose

    Any persisting gap.



  • 13.  RE: Momentum based sector rotation strategies.

    Posted 03-10-2023 15:51

    Whether the momentum lasts a long time or not depends on the time scale. If you're looking at monthly candles, there's lots of momentum left. The high-frequency algos are out for a quick kill intraday, intraweek. I'm a "low frequency" user. 

    AAII Houston TX Member