Investing Research Articles

…realistic assumptions about business cycle predictability make it unlikely that an investor can outperform the broad stock market using a conventional sector rotation strategy. A more focused, unconventional sector rotation strategy might outperform.

A subscriber asked about a strategy that rotates among equity sectors according to the Leading Economic Index (LEI), published monthly by the Conference Board (see “Leading Economic Index and the Stock Market”). To assess LEI usefulness for sector rotation, we consider the following nine sector Standard & Poor’s Depository Receipts (SPDR) exchange-traded funds (ETF): Materials… Keep Reading

…investors can significantly outperform the broad U.S. stock market by rotating into cyclical (noncyclical) sectors when the Federal Reserve discount rate begins falling (rising).

A subscriber asked about a strategy that rotates among equity sectors according to changes in interests rate as set by Federal Reserve Bank monetary policy. To investigate, we consider the following nine sector Standard & Poor’s Depository Receipts (SPDR) exchange-traded funds (ETF): Materials Select Sector SPDR (XLB) Energy Select Sector SPDR (XLE) Financial Select Sector… Keep Reading

Do differences in equity sector responses to stock market crashes (and associated volatility spikes) support an exploitably attractive sector rotation strategy? In the November 2020 update of his paper entitled “Actively Using Passive Sectors to Generate Alpha Using the VIX”, Michael Gayed examines a cyclical-defensive sector rotation strategy using the level of the CBOE S&P… Keep Reading

Can machine learning perfect equity sector rotation? In the January 2023 version of their paper entitled “Deep Sector Rotation Swing Trading”, flagged by a subscriber, Joel Bock and Akhilesh Maewal present a sector rotation strategy guided by multiple-input, multiple output deep learning model. The strategy chooses weekly from among 11 U.S. sectors using exchange-traded fund… Keep Reading

A subscriber asked about a strategy that holds a portfolio of cyclical sectors and small capitalization stocks during November through April and a portfolio of defensive sectors during May through October, as follows: Cyclical: Materials Select Sector SPDR (XLB) Industrial Select Sector SPDR (XLI) Consumer Discretionary Select SPDR (XLY) Vanguard Small Capitalization Index Fund (NAESX)… Keep Reading

Do Relative Rotation Graphs (RRG), which visually segregate assets into leading, weakening, lagging or improving quadrants by relative performance, effectively identify equity sectors with relatively strong future returns? In his September 2023 paper entitled “Dynamic Sector Rotation”, John Rothe tests an RRG-based sector relative momentum strategy with stop-loss risk management based on volatility. Specifically, he:… Keep Reading

Is recent Fama-French 5-factor alpha (accounting for market, size, book-to-market, profitability and investment risks) a useful predictor of U.S. equity sector performance? In other words, is there an alpha momentum anomaly at the sector level? In their June 2017 paper entitled “US Sector Rotation with Five-Factor Fama-French Alphas”, Golam Sarwar, Cesario Mateus and Natasa Todorovic examine 5-factor alphas of… Keep Reading

…among a broad sample of actively managed mutual funds, stock picking makes a greater contribution to returns than sector allocation. The average contributions to fund returns from market-sectors-stocks are 79%-9%-12%.