Bear Market Theme: S&P 500 vs Energy Sector Strategy


A strategy that has been working very well for trading the S&P 500 since the beginning of our current bear market in late 2007 is playing the relative performance between the S&P 500 (SPY) and the energy sector (XLE).

The graph below shows a simple leader/laggard strategy (red) versus the S&P 500 buy & hold (blue) from 10/2007: go long the SPY at today’s close if XLE lagged the SPY today, and go short the SPY if XLE led.


This strategy predicted 60% of days correctly with winners 1.2x larger than losers.

I call this a theme (implying that it’s temporary) because prior to the start of this bear market it didn’t provide any consistent edge. See graph below of the same strategy from 1999.


The theme has been strong enough for the last year that I’ll be tracking it on the State of the Market report beginning tomorrow.

Happy Trading,


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2 Responses to “Bear Market Theme: S&P 500 vs Energy Sector Strategy”

  1. 1 Jeff P

    Good work. Does a rolling correlation inform the trader as to when the strategy will outperform chance? Alternately, does tracking postive/negative P&L model performance indicate sufficient periods of persistance to make it tradeable? Regards, J

  2. 2 marketsci

    RE to Jeff: the approach we take in the State of the Market report is something akin to a rolling P&L. Based on the results in this post, the approach has been very tradeable since the beginning of the drawdown in 2007, but prior to that, the approach was completely useless. michael

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