Sector Mean Reversion

Entry Logic

• Long Entry: A specific sector ETF is down significantly more than the broader market.
• Short Entry: A specific sector ETF is up significantly more than the broader market.
• Confirmation: The relative weakness/strength begins to fade.
• Timeframe: Daily.
• Location: Extreme relative performance.
• Market Condition: Any.

Exit Logic

• Profit Target: The sector's performance reverts to the market mean.
• Scaling Out: No.
• Trailing Stop: No.
• Signal Failure: Exit if the sector continues to underperform/outperform.
• Opposite Signal: Not applicable.
• Time Expiration: 5-10 trading days.
• Momentum Loss: Exit if the reversion stalls.

Stop Loss Structure

• Hard Stop: A new relative performance high/low.
• Soft Stop: If the sector does not start to revert within 2-3 days.
• Max Dollar Loss: $2000.
• Max Percent Loss: 4%.
• Structural Stop: Not applicable.

Risk Management Framework

• Risk Per Trade: 2%.
• Daily Limit: Not applicable.
• Weekly Limit: 6%.
• Max Drawdown: 20%.
• R:R Requirement: 2:1.

Position Sizing Model

• Sizing Approach: Long the underperforming sector ETF, short the broad market ETF (e.g., SPY) in a dollar-neutral way.
• Volatility Adjustment: No.
• Conviction Sizing: No.
• Scaling In: No.
• Scaling Out: No.

Trade Filtering

• Market Conditions: Best when the market is not in a full-blown panic.
• Setups: Look for a clear divergence in performance between a sector and the market.
• Instruments: Sector ETFs (XLK, XLF, XLE, etc.) and broad market ETFs (SPY, QQQ).
• Time Restrictions: None.
• Chop/News Avoidance: Be aware of sector-specific news.

Context Framework

• Trend Direction: Not applicable.
• VWAP Relationship: Not applicable.
• MA Relationship: Not applicable.
• Range Location: At an extreme of relative performance.
• Higher TF Alignment: Not applicable.

Trade Management Rules

• Breakeven: No.
• Scale Out: No.
• Add Size: No.
• Fast vs Slow Moves: Works for both.

Time Rules

• Optimal Window: Any.
• Times to Avoid: Around major economic data releases.
• Session Notes: A longer-term mean reversion strategy.

Setup Classification

• A+ Setup: A historically stable sector shows a major performance divergence.
• A Setup: A more volatile sector shows a significant divergence.
• B Setup: A minor divergence.
• C Setup: No clear divergence.

Market Selection Criteria

• Instruments: Liquid sector ETFs.
• Volume: High.
• Volatility: Moderate.

Statistical Edge Metrics

• Win Rate: 60-70%.
• Avg Win: 2.5R.
• Avg Loss: 1R.
• Profit Factor: 2.0.
• Expectancy: +0.75R.

Failure Conditions

• Market Conditions: A fundamental shift in the economy that favors or punishes a specific sector for a long time.
• Specific Scenarios: The dot-com bubble and bust is a classic example of sector performance divergence that did not revert for a long time.

Psychological Rules

• Discipline: Must be patient and allow the trade to work over several days or weeks.

Advanced Components

• Regime Detection: Be aware of the overall economic cycle.
• Filters: Avoid sectors with very low liquidity.
• Correlation: The strategy is based on the correlation between a sector and the market.
• MTF Alignment: Not applicable.

Location

• Strongest: In markets with regular sector rotation.
• Weakest: In markets dominated by a single theme or narrative.