Sector Momentum Pro

The main iShares sector ETFs: XFN (Financials), XEG (Energy), XIT (Technology), XMA (Materials), XRE (Real Estate), XUT (Utilities), XGD (Gold), XBM (Base Metals). These cover the major TSX sectors.

3 months (63 trading days) is a good starting point - it balances responsiveness with stability. Some use composite momentum combining 1, 3, 6, and 12-month periods for smoother signals.

Typically 2-3 sectors is a good balance. Fewer than 2 is too concentrated; more than 4 starts to look like the index. Top 3 is a common choice.

Yes, XIU (iShares S&P/TSX 60) is the standard benchmark for Canadian sector analysis. Your relative strength calculations should compare sectors to XIU to see who's outperforming the market.

Get prices for today and N days ago. ROC = (Today - N days ago) / N days ago × 100. For 3-month: use prices 63 trading days apart. Rank all sectors by this ROC from highest to lowest.

Dual momentum requires both positive absolute momentum (sector going up) AND relative outperformance vs market. It adds protection by avoiding sectors that are just falling less than the market. Recommended for most users.

The filter keeps you out of sectors in major downtrends. Only buy sectors above their 200-day MA. This can reduce drawdowns significantly though it may cause you to miss early recoveries.

Relative Rotation Graph plots RS ratio vs RS momentum. Sectors rotate through 4 quadrants: Leading (top right), Weakening (bottom right), Lagging (bottom left), Improving (top left). It visualizes the rotation cycle.

It can help as confirmation. Financials tend to lead early cycle; energy leads late cycle. But momentum should be primary - if momentum disagrees with cycle expectation, trust the momentum signal.

With a trend filter, you'd go to cash. Without a filter, you'd buy the 'least bad' sectors. Dual momentum approach would put you in cash if absolute momentum is negative for top sectors. Cash is a valid position.

Long top 2-3 sectors via ETFs. Short bottom 2-3 sectors using inverse ETFs (like HXD) or by borrowing and shorting sector ETFs. Size for dollar-neutral or beta-neutral. Watch borrow costs and inverse ETF decay.

Target a constant portfolio volatility by adjusting position sizes. When recent volatility rises, reduce exposure. Formula: Position = Target Vol / Realized Vol × Base Position. This helps reduce momentum crash impact.

Multiple protections: 1) Volatility scaling (reduce size when vol spikes), 2) Trend filters (avoid downtrending sectors), 3) Diversification (multiple sectors), 4) Stop losses, 5) Dual momentum. No single solution; combine approaches.

Calculate momentum rank and value rank separately. Value can be sector P/E relative to history. Average the ranks or use value as a filter (only buy sectors not extremely expensive). Research suggests combination can improve risk-adjusted returns.

Total return, excess return vs XIU, Sharpe ratio, information ratio, max drawdown, turnover, and win rate by rotation. Also do regime analysis (bull/bear performance) and attribution (what drove returns).