Investment Thesis

Core Premise:
Sector leadership exhibits persistent momentum that can be captured through relative strength analysis, while liquidity screening ensures tradability in large-cap equities.

Key Strategy Principles

Sector Momentum Capture

  • Focuses on Morningstar sector classifications (real-time fundamental data).
  • Selects top 3 sectors using 20-day rate-of-change momentum.
  • Exploits intermediate-term persistence in sector performance.

 

Liquidity-Centric Universe

  • Screens top 100 liquid US equities by dollar volume.
  • Monthly rebalancing aligns with institutional flow cycles.
  • Avoids small-cap volatility while maintaining diversification.

 

Multi-Layer Diversification

  • Spreads exposure across 24 positions (3 sectors × 8 stocks).
  • Equal-weight allocation within sectors.
  • Natural sector rebalancing through monthly selection.

Quantitative Edge Drivers

  • Momentum Filter: 20-day ROC window optimizes for intermediate trends while avoiding short-term noise.
  • Volume Screening: Front-runs institutional order flow in high-liquidity names.
  • Dynamic Rebalancing: Daily position sizing adapts to changing sector leadership.

Risk Management Profile

  • Implied Sector Correlation: Reduces single-stock risk through sector baskets.
  • Automatic Drawdown Control: Regular rebalancing forces profit-taking.
  • Large-Cap Bias: Inherently lower volatility than broad market.
  • Return Profile: Targets 1.5-2× SPY returns with 1.3× volatility.
  • Expected maximum drawdown: 25-30% vs. market's 35%+

 

This strategy suits investors seeking:
✓ Systematic exposure to sector trends.
✓ Lower turnover than daily momentum strategies.
✓ Institutional-grade liquidity profile.

Author

Quant League Competitions

January 2025