Rotation Research: AH + Cross-Asset + Dynamic Threshold

Research directions 3, 4, 5 | AH overnight rotation, TLT/HYG/UUP/FXY, VIX-adjusted thresholds

3. AH/Overnight Sector Rotation -> Next Day MOO 9:55

+22.5pp
Fin SHORT: AH Energy>Fin
92.0%
Semi LONG when Semi<
82.2%
Soft SHORT when Semi>Soft AH
+8.4pp
Ind LONG: AH Ind>Semi

AH Rotation Pairs (T-1 AH -> T MOO 9:55)

AH PairTradeFav WRNUnfav WRDelta
Energy > FinancialsFin SHORT+fc83.2%15560.7%+22.5pp
Energy > FinancialsEnergy LONG+fc68.4%25062.6%+5.8pp
Ind > SemiInd LONG+fc67.6%43559.2%+8.4pp
Semi vs SoftSemi LONG+fc56.1%22164.7%-8.6pp
Semi vs SoftSoft SHORT+fc61.4%23666.2%-4.8pp

Key finding: AH rotation is INVERTED for Semi/Soft — when semi leads in AH, semi WORSE next day. But Energy>Fin AH = strong signal (+22.5pp for Fin SHORT).

AH Drift Magnitude: Semi vs Soft (next day)

AH BucketSemi LONG+fcSoft SHORT+fcSoft LONG+fc
Semi << Soft (AH)92.0% (N=25)30.0% (N=20)94.8% (N=58)
Semi < Soft65.8% (N=199)64.4% (N=216)60.8% (N=479)
Neutral64.2% (N=2092)65.1% (N=3093)56.2% (N=3456)
Semi > Soft55.0% (N=211)82.2% (N=157)54.0% (N=387)
Semi >> Soft-81.0% (N=63)70.8% (N=24)

Mean reversion! Semi lagging in AH -> Semi LONG 92%/66% next day. Semi leading in AH -> Soft SHORT 82%. Opposite of PM rotation (which is continuation).

5. Cross-Asset Rotation: TLT, HYG, UUP, FXY, VXX

TLT vs HYG (risk appetite)

SignalSector+DirWR%N
Risk-off strongFin SHORT+fc93.0%71
Risk-off strongSemi LONG+fc89.7%39
Risk-off strongSoft SHORT+fc91.4%58
Risk-off strongConsDiscr LONG+fc79.9%144
Risk-off strongHC LONG+fc75.9%133
Risk-on strongMaterials SHORT+fc82.3%62
Risk-onSoft SHORT+fc69.0%939
Risk-on strongEnergy LONG+fc41.7%132

Risk-off strong (TLT>>HYG) = extreme signal: 89-93% WR for Fin/Semi/Soft. Risk-on strong: Materials SHORT 82%, but Energy LONG fails (41.7% TRAP).

USD (UUP) & Yen (FXY)

SignalSector+DirWR%N
USD upMat SHORT+fc69.9%768
USD flatEnergy LONG+fc67.1%2668
Yen downMat SHORT+fc70.3%1165
Yen flatSoft SHORT+fc67.5%1813
Yen upSemi LONG+fc59.3%408

USD strong = Materials SHORT works (USD up = commodity sell). Yen down = risk-on = Mat SHORT continuation.

VXX Spike as Context

VXXSector+DirWR%N
VXX spike >3%Mat SHORT+fc71.0%614
VXX spikeEnergy LONG+fc47.4%420
VXX crash <-3%Semi LONG+fc67.8%395
VXX crashEnergy LONG+fc66.3%439

VXX spike = fade growth (Mat SHORT 71%). VXX crash = buy dip (Semi/Energy LONG). TRAP: Energy LONG + VXX spike = 47%.

Cross-Asset + PM Rotation Combos (rot_fav + fc + macro)

ComboWR%NPF
Semi LONG rot+fc+HYG_up92.0%2552.73
Materials SHORT rot+fc+HYG_up81.0%216.81
Semi LONG rot+fc+risk_off80.0%354.75
Energy LONG rot+fc+HYG_up77.0%616.27
Energy LONG rot+fc+risk_on77.4%623.59
Materials SHORT rot+fc+risk_on73.0%1117.21
Materials SHORT rot+fc+HYG_dn71.0%1625.12
Financials SHORT rot+fc+risk_on70.1%1441.59

4. Dynamic Threshold: VIX-Adjusted

Semi LONG + fc: Dynamic vs Static (all VIX>35)

MethodFav WRNUnfav WRDelta
Static 0.369.1%39269.2%-0.1pp
Static 1.071.5%27066.7%+4.8pp
Dynamic base=0.2572.8%25468.3%+4.5pp
Dynamic base=0.3070.7%22965.5%+5.2pp
Optimal (1.9)71.0%18656.2%+14.7pp

Dynamic threshold with base=0.25 gives best balance: WR 72.8% with decent N (254). Optimal threshold=1.9 maximizes delta to 14.7pp but loses half the trades.

Recommendation

Use dynamic threshold: base=0.25 * (VIX/20)
VIX=20: thresh=0.25% | VIX=30: thresh=0.38% | VIX=40: thresh=0.50%
Higher VIX = need bigger rotation spread to be meaningful. +4.5pp delta vs static.
CAVEAT: All PM data is VIX>35 (earnings subset). Cannot validate at low VIX. Need ETF PM data for multi-regime testing. For now, use static 0.3 as fallback when VIX<25.

Combined Findings & New Scoring Factors

NEW FACTOR AH Energy>Fin -> Fin SHORT next day: WR 83.2% (N=155), delta +22.5pp. AH rotation = continuation for old-economy rotation. Add to scoring: +2.0
NEW FACTOR AH Semi< Semi LONG / Soft LONG next day: WR 92%/95%. AH divergence = MEAN REVERSION overnight. When semi lags in AH, it catches up post-open. Add: +2.0
NEW FACTOR Risk-off strong (TLT>>HYG >1%) + fc: WR 89-93% for Semi/Fin/Soft. Flight to quality = concentrated tech momentum. Add to scoring: +2.0
BOOSTER PM rotation + HYG_up combo: Semi LONG 92%, Materials SHORT 81%. Credit risk-on confirming rotation = max conviction. Layer on existing rot signal: +1.0
BOOSTER USD_up + Materials SHORT: WR 69.9% (N=768). Strong dollar = commodity pressure = fade materials. Independent signal: +0.5
BOOSTER Yen_down + Materials SHORT: WR 70.3% (N=1165). Risk-on yen carry = materials continuation. +0.5
TRAP CONFIRMED Energy LONG + VXX spike >3%: WR 47.4% (N=420). Vol spike kills energy momentum. -1.5
TRAP CONFIRMED Energy LONG + Risk-on strong (HYG>>TLT): WR 41.7% (N=132). Counter-intuitive: extreme credit risk-on = energy already priced in. -1.0
KEY INSIGHT PM rotation = CONTINUATION, AH rotation = MEAN REVERSION. This is the critical distinction. PM drift in last 30min before open predicts same-direction continuation. AH drift (16:00-19:00) predicts REVERSAL. Two complementary signals for different timeframes.