Last week’s post introduced the S&P 500 Sector Spiders and presented a backtest of a simple strategy (that didn’t work.)
This week, we outlined a simple momentum-based rotation strategy that also didn’t work. Worse, it worked before 2010 and stopped working after that. So, if you were unlucky enough to run this backtest 10 years ago, you would’ve watched the S&P 500 run laps around you.
When you step back and think through what this strategy does, you’ll realize that it is not very different from what most people do after listening to media reports about how some sectors did well in the recent past. At any given point, something or the other will be outperforming. Now it is Oil & Gas, yesterday it was Tech, tomorrow it will be Infrastructure, and so on.
And usually, buying recent outperformers works. After all, isn’t this what momentum strategies do?
However, when it comes to sectors, buying recent out-performers doesn’t seem to work. C'est la vie.
Coming up: Should we buy beaten down sectors? Stay tuned!