When stocks in a particular sector are booming, even a mediocre company in such sector can deliver generous gains. On the other hand, when global stock markets are collapsing, chances are that most individual stocks will also suffer heavy losses.
Individual stock selection is important, but knowing when to buy or avoid stocks in a particular sector can be even more crucial in terms of maximizing returns and controlling downside risk.
No quantitative system can be perfect or infallible. However, there is plenty of statistical research showing that investors can outperform a buy and hold strategy in the long term by implementing quantitative trading strategies based on trend following and relative strength in different asset classes and sectors.
The Global Rotation system basically uses trend-following to choose between two portfolios, one based on different U.S. sectors and industries and another one based on global asset classes. Among each portfolio, the system always picks the 3 ETFs with superior relative strength in the middle term.
The system has produced an impressive performance in the long term, and it can provide a lot of valuable information when it comes to evaluating the market environment in order to make more effective investment decisions.
How The Global Rotation System Works
We start by creating two different portfolios: The sector portfolio and the asset class portfolio.
The sector portfolio includes 25 ETFs representing different sectors and industries in the U.S. stock market.
Those are:
