Sector Rotation: Complete Research Report

Software vs Semiconductors + 30 sector pairs | 18 cross-factors | 7 research scripts | 245K trades | 12m + 2m + 1m

30
Rotation pairs tested
18
Cross-factor dimensions
7/8
Robustness checks passed
+226%
Backtest P&L improvement
12
New scoring factors
4
New traps found
  1. Core Discovery: PM Rotation = Continuation
  2. 30 Sector Pairs: Scoring Table (1m/2m/12m)
  3. AH Rotation = Mean Reversion (opposite of PM!)
  4. Cross-Asset: TLT, HYG, UUP, FXY, VXX
  5. Mega-Cap Influence (NVDA, MSFT, XOM)
  6. Breadth, Herd, Options, Auction
  7. Context: SPY/QQQ, Day-of-Week, Consensus
  8. Amplifiers: What Makes Rotation Stronger
  9. Traps: When Rotation FAILS
  10. Final Scoring Integration

1. Core Discovery

CORE INSIGHT PM drift 9:00-9:25 between sectors = CONTINUATION signal. When one sector leads another in pre-market, the leader continues post-open (MOO 9:55). Strongest window: 9:00-9:25 (not 8:00-9:00, not full 8:00-9:25).
GATING FACTOR fc_confirms is mandatory. Without first candle confirmation, ALL rotation signals drop to 35-42% WR. Rotation alone = weak. Rotation + fc = strong. This was confirmed via conditional independence test (+8.3pp beyond fc alone for Semi LONG).
ROBUSTNESS Semi LONG rot_fav+fc: 7/8 validation checks passed. Half-split stable (67%/73%), all quarters >65%, bootstrap CI [64.5-73.5%], threshold-insensitive (works at 0.1-2.0), +8.3pp independent lift, worst month 57%.

2. Top Rotation Pairs: 1m / 2m / 12m Scoring

Score +3 (weighted WR >= 85%)

LeadervsDir1m WR2m WR12m WRWeightedDeltaConf
FinTechITSvcLONG-96.4%80.7%92.5%+44.5MED
FinTechTransportLONG-96.4%76.2%91.4%+35.9HIGH
MaterialsCommMetalsSHORT95.7%95.7%74.4%90.4%+20.0HIGH
MaterialsITSvcSHORT91.6%91.6%82.2%89.2%+30.2HIGH
FV:SemisTransportLONG-90.7%84.4%89.1%+31.5HIGH
EnergyBaseConsDiscrSHORT100%75.0%76.1%85.3%+18.0HIGH

Score +2 (weighted WR 75-85%) — top 10

LeadervsDirWeighted12m NDelta
AI vs SemiSHORT84.9%91+4.4
Healthcare vs SemiSHORT84.8%254+5.8
Materials vs ConsDiscrSHORT84.4%434+8.2
EnergyBase vs TelecomLONG84.3%206+27.9
Materials vs E-commSHORT83.8%453+9.2
Financials vs TelecomSHORT81.3%353+30.8
Energy vs TechHWSHORT80.2%118+12.7
Industrials vs SemiSHORT80.2%155+18.3
AI vs MedDevicesLONG79.0%101+31.5
Healthcare vs AILONG77.4%887+16.2

3. AH Rotation = Mean Reversion

PM vs AH: Opposite Signals!

TimeframeSignal TypeExample
PM 9:00-9:25CONTINUATIONSemi leads PM -> Semi LONG 71%
AH 16:00-19:00MEAN REVERSIONSemi leads AH -> Semi LONG worse

Best AH Rotation Signals (T-1 AH -> T MOO)

AH SignalTradeWRNDelta
Energy > Fin (AH)Fin SHORT+fc83.2%155+22.5pp
Semi << Soft (AH)Semi LONG+fc92.0%25reversal
Semi > Soft (AH)Soft SHORT+fc82.2%157continuation
Ind > Semi (AH)Ind LONG+fc67.6%435+8.4pp

AH Drift Magnitude (Semi vs Soft)

AH BucketSemi LONGSoft SHORTSoft LONG
Semi << Soft92% (25)30% (20)95% (58)
Semi < Soft66% (199)64% (216)61% (479)
Neutral64% (2092)65% (3093)56% (3456)
Semi > Soft55% (211)82% (157)54% (387)

4. Cross-Asset Signals

Risk-Off Strong (TLT >> HYG > 1%)

TradeWRN
Fin SHORT + fc93.0%71
Soft SHORT + fc91.4%58
Semi LONG + fc89.7%39
ConsDiscr LONG + fc79.9%144

Cross-Asset + PM Rotation Combos

ComboWRN
Semi LONG rot+fc+HYG_up92.0%25
Semi LONG rot+fc+risk_off80.0%35
Energy LONG rot+fc+HYG_up77.0%61
Mat SHORT rot+fc+risk_on73.0%111

USD, Yen, VXX

SignalBest TradeWRN
USD upMat SHORT+fc69.9%768
Yen downMat SHORT+fc70.3%1165
VXX spike >3%Mat SHORT+fc71.0%614
VXX crash <-3%Semi LONG+fc67.8%395

TRAPS

SignalTradeWRN
Risk-on strongEnergy LONG41.7%132
VXX spikeEnergy LONG47.4%420
Prevol extremeEnergy LONG38.2%34

5. Mega-Cap Influence

Mega-CapSignalTradeWRN
NVDA surge >3%NVDA leading sectorSemi LONG rot+fc92.0%25
NVDA surge >3%Mat SHORT rot+fc81.8%22
NVDA up 1-3%Semi LONG rot+fc66.7%30
MSFT surge >2%MSFT leadingSoft LONG rot+fc26.2%42
MSFT flatSoft LONG rot+fc61.1%72

NVDA surge = max conviction for Semi LONG. But MSFT surge = TRAP for Soft LONG (26% WR!) — already priced in, everyone chasing.

6. Breadth, Options, Auction

Options Skew

Own SkewMat SHORT rot+fc
Mild put84.4% (N=32)
Strong call81.0% (N=21)
Neutral67.5% (N=609)
Mild call64.1% (N=78)

Put skew + Materials SHORT rotation = 84%. Options confirming direction.

Sector Breadth

BreadthMat SHORT rot+fc
Extreme >70%74.8% (N=433)
Broad 50-70%55.9% (N=188)
Mixed 30-50%65.4% (N=78)
Narrow <30%58.9% (N=56)

When >70% of sector gapping same direction = strongest signal.

Auction Imbalance

AuctionSemi LONGMat SHORT
No imb78.6% (42)78.0% (127)
Normal74.4% (43)65.8% (184)
Elevated75.5% (53)66.8% (401)
Extreme54.2% (24)75.0% (160)

Semi: extreme auction = noise (54%). Mat: extreme auction = strong (75%).

7. Context: SPY/QQQ, Day-of-Week, Consensus

SPY vs QQQ Divergence

Index DivSemi LONGFin SHORT
QQQ>>SPY92.0% (25)-
QQQ>SPY85.0% (20)67.7% (133)
Aligned60.6% (71)60.2% (196)
SPY>QQQ-41.4% (307)
SPY>>QQQ-88.0% (75)

QQQ>>SPY + Semi rot = 92%. SPY>>QQQ + Fin SHORT = 88%. Index divergence amplifies rotation.

Day of Week

DayMat SHORT rot+fc
Monday71.7% (N=99)
Tuesday62.5% (N=259)
Wednesday81.4% (N=177)
Thursday63.8% (N=149)
Friday57.7% (N=71)

Wednesday = peak (81.4%). Friday = weakest (57.7%).

Gap Consensus (within sector)

SpreadMat SHORTEnergy LONG
Consensus70.1% (147)54.4% (259)
Mixed71.4% (406)78.5% (228)
Divergent59.4% (202)33.1% (175)

Divergent gaps = TRAP for Energy LONG (33%!). Mixed = sweet spot.

8. What Makes Rotation STRONGER

+92% QQQ>>SPY + Semi LONG rot+fc: Index tech leadership confirms sector rotation. Maximum conviction.
+92% NVDA surge >3% + Semi LONG rot+fc: Mega-cap leading = sector follows.
+93% Risk-off strong (TLT>>HYG) + fc: Flight to quality = concentrated flow into quality tech.
+84% Materials SHORT + mild_put skew: Put options confirming downside rotation.
+82% Market breadth bear <20% + Mat SHORT rot: Broad selloff = materials fade strongest.
+81% Wednesday + Materials SHORT rot+fc: Mid-week = peak rotation signal.
+78% Sector breadth extreme >70% + Mat SHORT: Whole sector moving together = strong signal.
+78% No imbalance + Semi/Mat rot+fc: Clean rotation without crowded MOO order = better.
+76% Materials SHORT + prev_day slightly_up: Green prev day + rotation fade = 76%.
+75% Semi LONG + prev_day surge: Momentum continuation from previous day.

9. Traps: When Rotation FAILS

TRAP 26% MSFT surge >2% + Soft LONG rot+fc: MSFT already priced in. Chase = fail.
TRAP 33% Energy LONG + divergent sector gaps: When energy stocks disagree on direction = no signal.
TRAP 38% Energy LONG + prevol extreme: Too much PM volume = already moved.
TRAP 42% Energy LONG + risk-on strong (HYG>>TLT): Counter-intuitive: extreme credit = energy topped out.
TRAP 47% Energy LONG + VXX spike >3%: Vol spike kills energy momentum.
TRAP 54% Semi LONG + extreme auction: Crowded auction imbalance = noise.
TRAP 55% Semi LONG AH-favorable + no PM confirm: AH drift alone doesn't continue. Need PM confirmation.
TRAP 58% Friday + Materials SHORT rot: End-of-week = signal weakens.

10. Complete Scoring Integration

New Layer 16: Sector PM Rotation (implemented in scoring_v5.py)

IDFactorScoreWR%NType
ROT01Semi LONG rot_fav+fc+2.071.1%121booster
ROT02Materials SHORT rot_fav+fc+1.567.9%755booster
ROT04Energy LONG rot_fav+fc+0.857.0%660booster
ROT05Financials SHORT rot_fav+fc+0.856.6%715booster
ROT06Industrials SHORT rot_fav+fc+0.771.2%264booster
ROT07tSoft LONG mild unfav rotation-2.024.0%242trap

Proposed New Factors (from cross-factor research)

FactorScoreWR%NCondition
AH Energy>Fin -> Fin SHORT+2.083.2%155Yesterday AH rotation
Risk-off strong + fc+2.089-93%39-71TLT-HYG > 1%
QQQ>>SPY + Semi rot+1.592.0%25Index divergence
NVDA surge + Semi rot+1.592.0%25Mega-cap leading
Sector breadth >70%+1.074.8%433Whole sector consensus
Wednesday rotation boost+0.581.4%177Mid-week
Energy LONG + divergent gaps-2.033.1%175Sector disagreement
Energy LONG + VXX spike-1.547.4%420Vol spike
MSFT surge + Soft LONG-2.026.2%42Mega-cap already priced in
Friday rotation discount-0.557.7%71End of week

Backtest Impact: v5 + Rotation Layer

+693
New A-grade trades
69.8%
Upgraded trades WR
+226%
A+/A basket cumulative P&L

Materials SHORT biggest beneficiary: A-grade WR 54% -> 60%, +448 new trades. Energy LONG B+: 47% -> 55%, +420 trades. October P&L: +41% -> +108%.

Data Sources Leveraged

Datum API
- Intraday 1m bars
- PM stretch (5yr)
- MOO imbalances
- ETF PM (new: 12 ETFs)
Polygon
- Daily bars
- SIC codes
- Market cap
- Sector classification
Finviz
- Industry/theme tags
- Options skew
- AH close prices
- Technical indicators
Computed
- PM rotation signals
- AH sector rotation
- Cross-asset spreads
- Mega-cap gap influence