Better Sector Rotation Performance Through Signal Processing and Problem Segmentation
by Scott Juds
The founder of SumGrowth Strategies explains how to use his SectorSurfer service to build a sector rotation strategy that is optimized for both bull and bear markets.
Sector rotation, as an investment strategy, is rooted in the economic cycle data produced by the National Bureau of Economic Research (NBER) dating back to 1854. However, achieving satisfactory sector rotation investment performance has long been difficult or elusive. For example, Figure 1 illustrates how a sector rotation strategy employing the original nine Select Sector SPDR ETFs (exchange-traded funds) and a popular momentum algorithm (purple line, detailed later) barely outperforms a simple equal-weight portfolio of the same ETFs (red line). This article shows how performance similar to that of the “Desired Sector Rotation Strategy” (light blue line in Figure 1) can be achieved by utilizing advanced signal processing methods and employing problem segmentation to treat bull and bear markets as separate problems.
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