Sector Momentum Pro

Basic rotation uses single relative strength measure with monthly rebalancing. Sector Momentum Pro uses four momentum components (price momentum, ADX, RS, acceleration), weekly signals, trend/breadth filters, momentum-weighted positions, and stop losses. This sophistication aims to capture more of the momentum effect while managing risks better.

Research shows that while 12-month momentum persists, the most recent month often reverses (short-term reversal effect). By excluding it (12-1 momentum), we capture the medium-term trend while avoiding the recent reversal, improving signal quality.

If no sectors meet the minimum threshold, hold cash rather than forcing positions in weak momentum sectors. This typically occurs during market corrections or transitions when clear sector leadership is absent. Wait for qualifying signals before deploying capital.

Weekly review is recommended for Sector Momentum Pro. Calculate scores weekly, but only rebalance when rankings change significantly or stops are hit. This is more active than basic monthly rotation but captures momentum changes faster.

Convert each component to a z-score (standardized). Then: Composite = 0.40 × Price_Mom_z + 0.20 × ADX_z + 0.25 × RS_z + 0.15 × Accel_z. The weights reflect the relative importance of each component. Z-scores ensure fair combination across different scales.

Breadth measures the percentage of stocks within a sector trading above their 50-day MA. If 8 of 10 stocks in Materials are above their MA, breadth is 80%. High breadth (>60%) confirms broad participation in the sector trend. Low breadth suggests the index is being driven by just a few stocks.

If stops are hit, exit immediately per rules. The A-VIX filter should have already reduced exposure. After the crash, do not chase by immediately re-entering. Wait for: A-VIX to decline below 25, XJO to stabilize above 200-day MA, and new momentum signals to form. Re-enter gradually.

Yes, advanced implementation can short bottom 3 sectors (score below -1.0) while long top 3. This creates a market-neutral momentum strategy. However, shorting adds complexity and costs. Start with long-only, add short side only after mastering the basics.

Define regimes using A-VIX and XJO trend. Low A-VIX (<15) + XJO above 200-day = favorable regime, full exposure. A-VIX 15-25 OR XJO near MA = neutral regime, 75% exposure. A-VIX >25 OR XJO below MA = unfavorable regime, 50% exposure or less. Regime detection should be systematic, not discretionary.

Include: standard momentum components (12-1, ADX, RS, acceleration), macro features (A-VIX, AUD/USD, iron ore, RBA rate expectations, China PMI, yield curve), cross-sectional features (sector rank, spread to median), and calendar features (month, quarter). Use feature importance to select the most predictive subset.

Track the spread between top and bottom sector momentum (long-short returns). Calculate rolling percentile of this spread versus history. When spread exceeds 90th percentile, crowding risk is high. Also monitor fund flows into momentum strategies - high inflows suggest crowding.

For top momentum sectors: buy 30-delta calls, 45 DTE, roll at 21 DTE or 50% profit. Size so premium risk is 2% of sector allocation. This provides 3-4x leverage with defined risk. For protection: buy ATM puts on XJO when A-VIX is low (cheap protection). Collar individual positions showing large profits.