The Sector Rotation Alpha strategy identifies high probability, bullish directional trades on stocks that reside in 60 major industry sectors. The strategy’s foundation is based on the fact that institutional money continuously rotates from sector to sector. Our algorithms continuously monitor and rank the 60 industry sectors, and then “follows the money” by identifying the strongest stocks within the strongest sectors.
As an example, after Donald Trump was elected president in Nov 2016 investors started to rotate cash into aerospace and defense stocks & ETFs on the presumption that Mr. Trump was going to increase spending on the military. As cash flowed into this sector it drove up the prices of many of the stocks in the sector, and especially the stocks with the strongest fundamentals.
When appropriate, this strategy also allocates a portion of the portfolio to short hedge trades. For the bullish trades we buy the underlying stock. For the bearish trades we will typically buy put options on the S&P500 index. Approximately four percent of the portfolio is allocated to each trade.
Summary of Benefits
Managed by a trading-centric portfolio manager who is:
- Nimble and fast moving
- Follows strict exit rules and will close positions decisively as dictated by the technicals
- Dramatically increases the probability of locking-in gains and preserving capital during periods of high volatility
When appropriate, options-based hedges are opened and managed to:
- Reduce volatility of the portfolio
- Offer some protection during market corrections or black swan events
Dynamic allocation of trades that “follow the money” as large institutions rotate cash across 60 industry sectors
Sophisticated analysis comprising technical, fundamental and factor-based quantitative analysis
- Identify stocks that have moved into high probability technical setups, including:
- Accumulation and distribution
- Relative strength
- Identify stocks that have strong fundamentals, typically within the top 20 percentile
- Sales growth
- Earnings growth
- Pretax profit
- Return on equity
- Perform factor-based quantitative screen to identify stocks that:
- Have high probability of making a move up or down
- Have high probability that the magnitude of the move will be significant