Sector rotation—moving your investments among the various industry sectors during different phases of the economic cycle—is not new to Brinton Eaton, nor to the industry. However, after more than a year of research, analysis, modeling, and rigorous testing, we have created and refined a strategy that helps to detect, with greater certainty and speed, when downward trends are developing within a particular sector.
In doing so, we have identified momentum indicators — signals particular and internal to each sector. It is possible to design a momentum strategy that is very sensitive to movements in the market. However, this strategy will give frequent buy and sell signals and can often be wrong. It is also possible to design a strategy that is far less sensitive to market movements. This kind of strategy will be very stable, providing relatively few buy and sell signals. The problem is that those signals are often late—typically too late, on the way out, to avoid much of the decline, and, on the way in, to capture much of the appreciation.
Constructing an appropriate strategy is about balancing sensitivity to market movements with signal stability. The mathematics behind the momentum signals we will employ are based on those in the field of electrical engineering, where much work has been done in distinguishing signals from noise.
The ability to dynamically go from being more sensitive to more stable—and the way we have layered multiple signals into this decision—is one of the characteristics that we believe distinguishes Brinton Eaton’s proprietary strategy from most others. It is part of our overall approach to being more nimble in responding to fundamental market changes.
The result? We have tested our momentum-based sector rotation strategy against numerous potential market environments. In each of these, the strategy performed at least as well as the relevant benchmark (the S&P Stock Index) and significantly outperformed the benchmark in times of substantial market decline.
