Sector momentum rotation on SPY — Published Backtest & Verdict

The rotation lost narrowly to doing nothing: +188.2% vs +193.9% over 7.1 years, with max drawdown only ~3 points kinder (-30.8% vs -33.7%). The protection was real but concentrated — 2022 cost the basket about -5.5% vs SPY's -19.0% — while the recovery years bled (2023: about +9.3% vs +26.0%). Momentum kept the basket in XLK for 52 of 86 months, so the "rotation" was mostly a tech fund with extra steps and 86 rebalances of effort. We publish losers too.

• Total return: +188.2% (trailed buy-and-hold at +193.9%)
• CAGR: +16.0% vs +16.3% buy-and-hold
• Max drawdown: -30.8% vs -33.7% buy-and-hold
• Win rate: 61.6% over 86 trades
• Period: 2019-09-03 to 2026-10-27 (SPY), published 2026-10-28

Cost assumption: slippage and commissions aren't modeled — fills are assumed at the exact closing price with no trading fees, the same assumption stated on How We Backtest. Real execution will differ, usually for the worse.

The claim on trial

Rotating monthly into the two sectors with the strongest 6-month momentum beats buy-and-hold.

The exact rules

• Rebalance on the first trading day of each calendar month, at the close.
• Rank XLK, XLF, XLE, XLV, XLY by trailing 6-month return (126 trading days), skipping the most recent month (the 21 trading days immediately before the rebalance day are excluded): rank = close[i-21]/close[i-147]-1.
• Hold the top 2 equal-weighted (50/50) until the next rebalance. Trade at the close on rebalance days; the new basket starts earning the next bar (no look-ahead).
• Long only, always fully invested, cash earns 0%. No transaction costs, no taxes modeled (disclosed — 86 rebalances would incur real costs).
• Warmup 147 bars; strategy window starts 2019-09-03 (first month-start bar with a full ranking window). A "trade" is one monthly holding period.

Our honest verdict

The rotation lost narrowly to doing nothing: +188.2% vs SPY buy-and-hold +193.9% over 2019-09-03 to 2026-10-27, max drawdown only ~3 points kinder (-30.8% vs -33.7%). Protection was real but concentrated (2022: about -5.5% vs -19.0%); recovery years bled (2023: about +9.3% vs +26.0%), and XLK was held in 52 of 86 months — mostly a tech fund with extra steps.

Full trade log on Substack · Original X thread · StratIQ track record · All published backtests

Charted on TradingView (affiliate link — we may earn a commission at no extra cost to you): tradingview.com

Not financial advice — research and education only; do your own due diligence.