The heart of our sector rotation model is the algorithm which spots those sectors that have the best chances to outperform the market.
Sector rotation is a dynamic investment model which allocate funds between different equity sectors. The model is based on the tendency of different sectors to be most active during different periods of the economic cycle. Since business activity for the companies translates to more revenue thus having implications in the profitability of sectors, using the right model one can find top-performing sectors in the stock market. As seen in the illustration below in each phase of the business cycle there are different leading sectors,our mission is to spot them on time. It is important to understand that the market cycle model just gives the theoretical explanation of the market environment which drives long trends in sectors but it lacks the flexibility and accuracy required for real investing, so our framework is focused on finding the leading sectors rather than accurately pinpointing the phase of the market at any given point.
Sectors are trendy assets in nature, they tend to have more stable trend characteristic then other assets like single stock, commodities etc. This is the reason why many sector rotation strategies have a long history of market over-performance. our investment strategy algorithms spots the sectors with favorable trends and adust the portfolio accordingly. Below you can see an example of the market and different sectors performance for a period of 1 year. You can see that while the market (symbol:^GSPC) return was about 20% sector returns varied from 5-30% . The heart of our investment strategy is the algorithm which spots those sectors that have the highest statistical likelihood of outperforming the market in the near future.
Sector rotation model building blocks
Every weekend the strategy collects price data for all the sector funds / ETFs in use. Then the sectors are ranked based on the following factors:
1. Trend strength and consistency.
2. Momentum & Relative strength
3. Overbought conditions
4. Downside volatility
5. Support and resistance lines
6. Moving averages Filters
All of the above factors are synergized to form a unique ranking algorithm which has shown stable solid results in the last two decades. The highest ranking funds / ETF's are picked and a rotation occurs based on this picks only if: 1. Market timing is still in bullish mode. 2. One month minimum holding time criteria is met.
Major market crashed like the 2008 meltdown can do great harm to our portfolio that is why we have developed a risk on / risk off protection model which is part of our overall investment strategy, more about our Market timing protection model .
- Model : Sector rotation
- Objective : Increasing absolute return & alpha
- Time frame : 4 to 52 week
- Holdings : 3-6 out of 12 sectors.