Hedges/Shorting to Exploit Sector ETF Momentum?

Readers have proposed several hedging/shorting variations for “Simple Sector ETF Momentum Strategy Performance”, as follows: (1) buy the top and hedge with (short) the bottom sector based on past six-month return; (2) buy the top sector based on past six-month return and hedge it with a matched short position in the S&P 500 Index via ProShares Short S&P500 (SH); and, (3) buy the top (sell the bottom) sector when the S&P 500 Index is above (below) its 10-month simple moving average (SMA). The strategies apply to the following nine sector exchange-traded funds (ETF) defined by the Select Sector Standard & Poor’s Depository Receipts (SPDR), all of which have trading data back to December 1998:

Materials Select Sector SPDR (XLB)
Energy Select Sector SPDR (XLE)
Financial Select Sector SPDR (XLF)
Industrial Select Sector SPDR (XLI)
Technology Select Sector SPDR (XLK)
Consumer Staples Select Sector SPDR (XLP)
Utilities Select Sector SPDR (XLU)
Health Care Select Sector SPDR (XLV)
Consumer Discretionary Select SPDR (XLY)

Using monthly dividend-adjusted closing levels for the sector ETFs, the S&P 500 Index, SH (as available) and the 3-month Treasury bill (T-bill) yield over the period December 1998 through November 2011 (156 months), we find that: (more…)