Regime-Switched Industry Rotation with Reversal Stock Selection

Summary

This A-share strategy combines industry rotation with stock selection inside the chosen industries. It builds a regime measure from changes in industry return rankings: when that measure falls, it selects industries by longer-term momentum; when it rises, it switches to a shorter-term reversal ranking. Within the top industries, it ranks stocks using four signals tied to short-term reversal and low attention, then applies liquidity, listing-age, and trading-status filters. A holding buffer aims to reduce turnover.

The proposed risk changes reduce the number of stocks held, sit out a week when the selected industries change, and weight stocks inversely to recent volatility. The document reports that a historical backtest improved the Sharpe ratio and reduced maximum drawdown while keeping annualized return near its prior level, including in two split-period checks. These are in-sample historical results, not evidence of future performance. The frequent cash periods create a risk of missing rallies, and concentrated positions remain sensitive to trading costs and tracking error.

Key ideas

• The direction of a smoothed industry ranking-instability measure determines whether the strategy uses long-term momentum or shorter-term reversal to rank industries.
• Stocks within selected industries are ranked using four signals oriented toward short-term reversal and low attention.
• A holding buffer keeps existing stocks while they remain within a wider ranking band, reducing turnover.
• The risk adjustments combine fewer holdings, a one-week pause after industry membership changes, and inverse-volatility stock weights.
• The reported backtest shows improved risk-adjusted performance, but the results are historical and the frequent pauses may cause missed gains.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.