01 Mar Learning From Pension Partners' "An Intermarket Approach to Beta Rotation"
Rotating between the broad market and Utilities sector based on Relative Strength improves performance.
In this article, Absolute Momentum will be used interchangeably with trend following or time series momentum. Relative Momentum will be used interchangeably with cross-sectional momentum or relative strength.
Industry momentum is strongest in the short-term (one month) and tends to dissipate after 12 months.
The paper focuses on a particular sector, Utilities.
The strategy explored is:
When a price ratio (or the relative strength) of the Utilities sector to the broad market is positive over the prior 4-week period, position into Utilities for the following week.
When a price ratio (or the relative strength) of the Utilities sector to the broad market is negative over the prior 4-week period, position into the broad market for the following week.
“Chart 1” from the paper (reproduced below) shows the performance of the strategy compared to broad market and Utilities sector.
Source: Pension Partners
Authors: Charles V. Bilello, CMT, Michael A. Gayed, CFA
Company: Pension Partners