Futures Sector Rotation

Moving capital from weaker-performing sectors to stronger-performing sectors. Based on the observation that sector leadership changes over time, and owning leaders outperforms owning everything equally.

Momentum = (Current Price / Price N days ago) - 1. Common lookbacks: 3 months (63 days) or 6 months (126 days). Often skip most recent 5 days to avoid short-term reversal.

Monthly is most common - balances responsiveness with transaction costs. Weekly captures trends faster but costs more. Quarterly is cheaper but slower to adapt to changes.

Consumer Staples, Healthcare, Utilities - stable demand regardless of economy. Outperform in recessions. Use these when economic outlook is negative or uncertain.

Sector ETFs (iShares UK sectors), sector CFDs, baskets of individual stocks. ETFs are simplest - diversified, liquid, easy to trade. Consider costs and tracking error.

Momentum divided by volatility. Rewards consistent performers over erratic ones. A sector with 10% return and 15% vol beats 12% return with 25% vol using this measure.

Highly correlated sectors (Financials/Real Estate) provide little diversification when owned together. Better to select from uncorrelated sectors even if slightly lower momentum.

Only own sectors with positive absolute momentum. If all sectors negative, go to cash. Automatically reduces exposure in bear markets. Combined with relative ranking = Dual momentum.

Early recovery: Financials, Materials. Mid expansion: Industrials, Tech. Late expansion: Energy, Healthcare. Recession: Staples, Healthcare, Utilities. Use cycle as context for momentum signals.

Common: 8-10% trailing or absolute stop per sector. Triggers rotation to next best sector. Protects against individual sector crashes while maintaining exposure to rotation strategy.

Walk-forward testing (optimize, test forward, roll), use simple round-number parameters, test on multiple time periods, ensure statistical significance, keep strategy rules simple.

Combine momentum with value (cheap sectors), quality (stable earnings), sentiment (analyst views). Score sectors on multiple dimensions. More robust than single-factor momentum.

Include US, European, Asian sectors. Use global sector ETFs or regional sector ETFs. Consider currency impact - hedge or accept FX exposure. Add regional diversification constraints.

Call options for leveraged upside with defined risk. Puts for protection. Collars for bounded exposure. Pairs trades (long strong, short weak) for market-neutral rotation capture.

Allocation effect: Return from sector selection (overweight winners). Key metric for rotation. Calculate: Σ(Portfolio Weight - Benchmark Weight) × (Sector Return - Benchmark Return).