Sector momentum rotation

Sector rotation ranks a small set of sector funds on recent relative strength and holds the leaders. It is cross-sectional momentum applied to sectors rather than to hundreds of single stocks. Turnover is lower than a stock-level momentum book, and the short side can be skipped by holding cash or the market instead of the laggards.

Not investment advice. Nothing here is a recommendation to buy or sell anything. Backtests and historical studies are not guarantees, and a rule that worked in one sample can fail in the next. Trading can lose money. Links are for education, not endorsements. Do your own research.

Rules

Use a fixed list of sector ETFs or indexes. Each month, rank them on a 3-, 6-, or 12-month return and buy the top two or three in equal weight. Drop a sector when it falls out of that group. A long-only version holds the winners against cash. Publish the list and the lookback before looking at results, and do not swap in a sector because a chart looks strong.

Where AI fits

AI can run the rotation on a point-in-time sector list so dead or newly split sectors are handled honestly. It can test one lookback on a validation window. Letting a model pick a different sector universe every year until the curve is smooth is data mining.

Markets

Sector ETFs or sector indexes in one region. Mixing leveraged sector products into the list changes the bet.

Timeframes

Monthly, sometimes weekly. The signal is a multi-month return.

Risks

Sectors stay leadership for reasons that reverse with the cycle, and the rotation enters late. A handful of sectors means one energy or tech shock dominates. ETF launches and index reconstitutions bias a backtest that uses today's list for the 1990s.

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