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Rotation Investor S&P 500
Indicators, Universe, Methods and Signal Tables
The usual disclaimers apply for the strategies and the analysis on TrendInvestorPro. Past performance does not guarantee future performance. You and you alone are responsible for your investment and trading decisions. Do your own due diligence.
Rotation trading strategies capture the power of momentum by rotating into the strongest stocks and out of stocks that are losing upward momentum. This report explains the Rotation Investor SPX strategy (RO-Investor-SPX), which trades S&P 500 stocks using weekly signals. We cover the required conditions, trend indicators, momentum rank, rotation thresholds and exit signals. This report concludes with an overview of the signal pages and the ranking tables used to trade these strategies.
Rotation Investor vs Rotation Trader
The RO-Investor strategies are more long-term oriented than the Rotation Trader strategies (RO-Trader). For example, the RO-Investor strategies use 200 periods for their trend indicators, while the RO-Trader strategies use 60 and 120 days. In addition, the RO-Investor strategies use the current values for the momentum rank indicator, but RO-Trader strategies use a 20 day negative offset (value 20 days ago). The RO-Investor strategies have longer holding times, fewer trades and the average Profit/Loss Percent is larger. Both strategies trade once per week, but the RO-Investor strategies are for less active traders because they generate fewer signals.
RO-Investor-SPX Highlights
- Weekly Trading (once per week)
- Market beating returns with lower drawdowns
- Trend threshold to insure stock is in a strong uptrend
- Momentum rank to rotate into leading stocks
- Market timing model to trade only during bull markets
Dual-Momentum
Momentum has provided a persistent edge in the US equity markets for decades. Stocks that are currently in uptrends are more likely to extend their uptrends and stocks that are outperforming now are more likely to outperform in the future. This strategy capitalizes on momentum by using two types: absolute momentum and relative momentum. First, we filter to find stocks that are in strong uptrends (absolute momentum). Second, we rank performance to select stocks that are outperforming the other index constituents. When used with a market timing filter, this dual-momentum approach outperforms buy-and-hold with significantly lower drawdowns.
RO-Investor-SPX
RO-Investor-SPX trades stocks in the S&P 500, but excludes the finance sector because it is a long-term laggard. With over 70 stocks, finance stocks account for around 15% of the component stocks in the S&P 500. As a group, this sector is a persistent underperformer. In fact, it is by far the weakest of the 11 sectors over the last 20+ years. The PerfChart below shows 20 year performance for the 11 sector indexes. Notice that the S&P 500 Financials Index ($SPF) shows the smallest gain (short blue bar on the far right). Info Tech ($SPT) shows the largest gain (tall red bar on far left).
Strategy Mechanics
This is a long only strategy that trades only during bull markets. We use the SPX Breadth Model to define bull and bear market environments for stocks in the S&P 500. Indicators in this model include 13, 26 and 52 Week High-Low Percent, and the Percentage of Stocks above the 100, 150 and 200-day SMAs. The strategy is fully invested when the model is positive (bull market) and in cash when negative (bear market). This market filter limits drawdowns and preserves capital during bear markets. The chart below shows signals with the red and green triangles.
We use the 200-day Exponential Slope (eSlope) to define the trend and quantify trend strength. With over 400 stocks to choose from, it is important to focus on stocks that are in strong uptrends, not just uptrends. This means we apply a minimum threshold for the eSlope. eSlope values of +5 reflect an uptrend, but not necessarily a strong uptrend. We are looking for stocks with relatively high eSlope values. The chart below shows Applied Materials (AMAT) with a strong uptrend and high eSlope values for over a year.
The momentum indicator measures the volatility-adjusted rate-of-change (ROC). Instead of using pure momentum, we divide the Rate-of-Change by a volatility indicator to level the playing field. This means we are selecting stocks with the strongest momentum relative to their volatility. Risk (volatility) is being adequately rewarded (momentum).
We use the current values to rank stocks (no offset). The Nasdaq 100 and S&P 500 strategies purposely use different momentum indicators for ranking. This is to reduce duplicate positions and add an element of strategy diversification. We also smooth the SPX Momentum indicator with a 20-day EMA to reduce turnover within a 400+ stock universe.
There are two volatility filters. One excludes stocks with excessively high volatility (extreme risk), such as meme stocks like Gamestop (GME). The other filters out stocks with unusually low volatility because they are often takeover candidates. Stocks that receive a takeover bid often trade in tight ranges with extremely low volatility, such as Kellanova (K).
Once stocks meet the conditions above, this strategy buys the top 10 stocks and sells a position when the stock drops out of the top 20. This is the “rotation” aspect. The replacement is the stock with the highest ranking and a stock that is not already in the portfolio.
Initial positions are 1/10th of the portfolio (equal weight) and there is no rebalancing because this defeats the purpose of a momentum-rotation portfolio. Rebalancing involves selling a portion of the winners and redistributing the proceeds. The aim is to ride the winners, not to reduce exposure to the winners.
The rotation feature triggers sell signals in stocks that experience a decrease in relative momentum. These stocks are often still in uptrends, but relative momentum is waning. Exit signals, therefore, are not always based on a trend change or significant decline. This rotational aspect reduces the average loss. The strategy then rotates into stocks showing stronger momentum.
Systematic Trading
Systematic trading is a long-term endeavor, not a brief undertaking. There will be ups, downs, periods of outperformance and periods of underperformance. We cannot judge performance using days, weeks or even a few months. Long-term endeavors require a minimum of six months before passing judgement. Past performance does not guarantee future performance, but this dual-momentum strategy should keep its edge as long as the momentum edge persists in the US equity markets.
Signal Tables: Entries, Exits and Closed Positions
This section shows the signal tables that are posted at the end of every week (usually Saturday morning). We start with a summary table showing current positions and new entry/exit signals. The top 20 stocks for the current week and prior week are on the right (blue/yellow shading). These side-by-side tables make it easy to see when a stock falls out of the top 20 from one week to the next.
The table shows current positions (Open Long), new ENTRIES (green) and new EXITS (red). These signals are based on the close on the last trading day of the week. This date appears at the top left of the table. The actual ENTRY and EXIT are for the first trading day of the following week.
The current ENTRY/EXIT signals also appear below this table. In the example above, there is an ENTRY signal for LLY and an EXIT signal for RSG. Not all weeks have ENTRY and EXIT signals. Sometimes the portfolio stays the same. EXIT signals trigger for three reasons: the momentum rank falls out of the top 20, the three conditions are no longer met, or the SPX Breadth Model signals a bear market.
The next table shows the last 20 closed positions. This table includes the entry date, the exit date, the percentage gain/loss and bars held. Bars represent trading days (no weekends or holidays). 20 bars is the equivalent of four weeks and 126 bars is around six months. Notice that LDOS as held for over five months.
Rank and Signal Tables
The sample table below shows the conditions and rankings for the top 20 S&P 500 stocks (w/o financials) on October 25th.
- SPX Breadth Model: current signal for SPX Breadth Model (bull or bear market)
- GicsID: industry group code based on the S&P Gics Standard (here)
- Min&Max Volatility: Pass = stocks meeting the min and max volatility thresholds
- (Min filters out takeover candidates (low vol). Max filters out excessive risk (high vol))
- Strong Uptrend: Pass = stocks in strong uptrend (eSlope meets minimum threshold)
- Conditions: Pass = stocks that pass all conditions (SPX Momentum must also be positive)
- SPX Momentum: 20-day EMA of SPX Momentum indicator
- 5-day Change: 5-day point change in SPX Momentum indicator
Click a column heading to sort. For a two-column sort, press-hold the shift key and click two column headings. Use the search box to isolate a term (i.e. XLK or a GicsID).
(Sample) Rotation Investor S&P 500 - (close: Fri 25-Oct-2024)
| SPX Breadth Model | Rank | Ticker | GicsID | Sector | Company Name | Min&Max Volatility | Strong Uptrend | Conditions | SPX Momentum | 5-day Change | Chart Link |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Bull | 1 | HWM | 20101010 | XLI | Howmet Aerospace | Pass | Pass | Pass | 44.30 | -0.73 | HWM |
| Bull | 2 | MSI | 45201020 | XLK | Motorola Solutions | Pass | Pass | Pass | 38.16 | 1.11 | MSI |
| Bull | 3 | LDOS | 20202020 | XLI | Leidos | Pass | Pass | Pass | 38.12 | 1.69 | LDOS |
| Bull | 4 | GE | 20101010 | XLI | General Electric Co | Pass | Pass | Pass | 37.44 | -1.75 | GE |
| Bull | 5 | IRM | 60108010 | XLRE | Iron Mountain | Pass | Pass | Pass | 36.89 | 3.17 | IRM |
| Bull | 6 | WMT | 30101040 | XLP | Walmart | Pass | Pass | Pass | 36.14 | 2.22 | WMT |
| Bull | 7 | TT | 20102010 | XLI | Trane Tech PLC | Pass | Pass | Pass | 35.74 | 1.28 | TT |
| Bull | 8 | RTX | 20101010 | XLI | RTX Corp | Pass | Pass | Pass | 35.09 | -0.07 | RTX |
| Bull | 9 | AXON | 20101010 | XLI | Axon Enterprise | Pass | Pass | Pass | 35.03 | 2.34 | AXON |
| Bull | 10 | BSX | 35101010 | XLV | Boston Scientific Corp | Pass | Pass | Pass | 34.53 | -2.33 | BSX |
| Bull | 11 | PLTR | 45103010 | XLK | Palantir Tech A | Pass | Pass | Pass | 34.04 | 2.55 | PLTR |
| Bull | 12 | TRGP | 10102040 | XLE | Targa Resources Corp | Pass | Pass | Pass | 33.75 | 1.61 | TRGP |
| Bull | 13 | NVDA | 45301020 | XLK | NVIDIA Corp | Pass | Pass | Pass | 33.38 | 1.28 | NVDA |
| Bull | 14 | GDDY | 45102030 | XLK | GoDaddy A | Pass | Pass | Pass | 33.16 | 3.49 | GDDY |
| Bull | 15 | WAB | 20106010 | XLI | Westinghouse Air Brake Tech | Pass | Pass | Pass | 33.05 | 2.45 | WAB |
| Bull | 16 | FIS | 40201060 | XLU | Fidelity National Informatio | Pass | Pass | Pass | 32.91 | 0.73 | FIS |
| Bull | 17 | FICO | 45103010 | XLK | Fair Isaac Corp | Pass | Pass | Pass | 32.00 | -1.30 | FICO |
| Bull | 18 | MMM | 20105010 | XLI | 3M Co | Pass | Pass | Pass | 31.59 | -2.44 | MMM |
| Bull | 19 | META | 50203010 | XLC | Meta Platforms A | Pass | Pass | Pass | 31.15 | 0.50 | META |
| Bull | 20 | FI | 40201060 | XLU | Fiserv | Pass | Pass | Pass | 30.82 | 0.71 | FI |
The usual disclaimers apply for the strategies and the analysis on TrendInvestorPro. Past performance does not guarantee future performance. You and you alone are responsible for your investment and trading decisions. Do your own due diligence.
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