Quad Diversification
This is still a research project, but I wanted to share some early thoughts:
What I saw in this recent quad change from 1 to 2 and now 3 is the following:
Within a quad1 or 2 you can expect (bullish) rotations. Well that is a “Binsenweisheit” (Truism), but I did not know how to play them!!!
It might start with pure tech strength and then it spills over to higher beta cycs.
The energy sector turned bullish on 7/14. It looked like a laggard, but my research shows you can take that trade within a quad 1 to 2. Your downside is limited since a quad 1-2 lifts all “higher beta boats” (just avoid defensives!).
The same happened on 11/13/2020:
(Here is the TC2000 Layout: https://www.tc2000.com/~AOeEl6 of above chart, the moving averages are based on relative strength, not price!).
Above chart: Again, energy looked like a laggard 11/30/20, but it is simply a rotation play within a strong Quad 1-2. And when Quad 3 hit for good in Jan 2022, you were already positioned!
I also analyzed why my small cap value momentum trading strategies hold up pretty well in regime changes (for example from quad 2 to 3):
It is very well diversified!
The last pop you see above was a Quad 2-3 exposure pop (the NOA Earnings pop for example, the strategy book was in NOA before earnings!). E.g., the pop was driven by exposures that are strong in quad 2 and 3!
Right now, half of the positions in my book are pure quad3 exposures (Energy, Shippers etc.) and it even has some quad4 exposures (MAMA for example). This has to do with 2 things: first I got some industry momentum in the ranking system. Second there is a ton of value in the energy sector right now and that is also in the ranking system. As soon as the industry momentum picks up just a little bit, those value exposures get picked.
In the moment the quad changes from 2 to 3, the 3 exposures hold up the strategy:
PFIE and KRT are good examples.
That lead me to the idea, that it is a good idea to play rotations within a quad 1-2 early on!
And looking at a ton of higher beta ETF Charts I can confirm that it is a good idea to buy “laggards” that turn bullish trend within a quad 1-2 environment, but only if they are quad 2 and quad 3 exposures. Again, if Quad 2 stays, you will make money and if it changes to quad 3 you are already positioned (and only have to sell the tech stuff, which is a quad 1-2 exposure).
Kudos to https://twitter.com/howtoswingtrade who got this energy trade early on, they played exactly the above “early rotation pattern”.
Have a great week.
Best regards and all the best.
Andreas
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