An Intermarket Approach to Beta Rotation: The Strategy, Signal, and Power of Utilities

2014 Charles H. Dow Award Winner

16 Pages Posted: 31 Mar 2014  

Charles V. Bilello

Pension Partners, LLC

Michael A. Gayed

Pension Partners, LLC

Date Written: January 31, 2014

Abstract

It is often said by proponents of the Efficient Market Hypothesis that no strategy can consistently outperform a simple buy and hold investment in broad stock averages over time. However, using a strategy based on the principles of intermarket analysis, we find that this assertion is not entirely accurate. The Utilities sector has many unique characteristics relative to other sectors of the broader stock market, including its higher yield, lower beta, and relative insensitivity to cyclical behavior. Our analysis suggests that rolling outperformance in the sector is not only exploitable, but also provides important signals about market volatility, seasonality, and extreme market movement. We explore historical price behavior and create a simple buy and rotate strategy that is continuously exposed to equities, positioning into either the broad market or the Utilities sector based on lead-lag dynamics. Absolute performance and risk-adjusted returns for this beta rotation approach significantly outperform a buy and hold strategy of the market and of the Utilities sector throughout multiple market cycles.

Keywords: Intermarket Analysis, Stocks, Utilities, Trading, Market, Momentum, Rotation, Volatility, Alpha, Beta, Equities, Sectors, Quantitative, Efficient Markets, Hedge, Asset Allocation

JEL Classification: C00, C10, C50, G00, G11

Suggested Citation

Bilello, Charles V. and Gayed, Michael A., An Intermarket Approach to Beta Rotation: The Strategy, Signal, and Power of Utilities (January 31, 2014). 2014 Charles H. Dow Award Winner. Available at SSRN: https://ssrn.com/abstract=2417974 or http://dx.doi.org/10.2139/ssrn.2417974

Charles V. Bilello

Pension Partners, LLC ( email )

430 West 14th Street
Suite 505
New York, NY 10014
United States
212-255-5000 (Phone)

HOME PAGE: http://www.pensionpartners.com

Michael A. Gayed (Contact Author)

Pension Partners, LLC ( email )

430 West 14th Street
Suite 505
New York, NY 10014
United States
2122555000 (Phone)

HOME PAGE: http://www.pensionpartners.com

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