AI-Powered Sector Rotation Strategy: The Best Sector ETFs Portfolio Based on Annual Forecasts


Sector Rotation: I Know First provides investment solutions for both individual and institutional investors, utilizing an advanced AI self-learning algorithm to gain a competitive advantage. We offer a personalized approach to our institutional clients, assisting them in their investment process based on their specific needs and preferences. For more details about I Know First solutions for institutional investors, please visit our website.

Sector Rotation: The Best Sector ETFs Portfolio Based on Annual Forecast

The following trading strategy was developed using I Know First’s AI Algorithm daily forecasts from January 1st, 2020, to May 31st, 2024, with a focus on S&P 500 stocks selected based on the signal filter. This strategy is available to our institutional clients: hedge funds, banks, and investment houses, as a tier 2 service on top of tier 1 (the daily forecast).

The strategy involves trading the Level 1 Sectors including broad segments of the economy, such as technology, healthcare, finance, and consumer goods to provide a high-level view of the market. A sector ETF is a pooled investment vehicle that invests specifically in the stocks and securities of a particular industry or sector (XLK – Technology, XLF – Finance).

The strategy involves constructing a 1-year signal-weighted portfolio with monthly rebalancing, achieved through the implementation of the signal filter. Moreover, the strategy controls the majority direction. The term “majority direction” refers to our predictions for stocks, upon which we base our position. This decision is guided by a number of long and short stock forecasts. Therefore, if the count of long stock forecasts surpasses the count of short stock forecasts, the majority direction is to go long, and we construct a long portfolio. Conversely, if the count of short stock forecasts is higher, we assume a short portfolio. Additionally, we utilize a signal outlier filter to ensure that stocks with signals outside of the selected range, i.e., those exhibiting extreme values, are not included.

In this strategy, we identify the top three Level 1 ETF sectors based on 1-year forecasts. If the majority direction is long, we go long in the best three ETFs, with a maximum allocation of 25% for each ETF, and invest the rest in SPY. If the majority direction is short, we go short in SPY at 50% of our portfolio, keeping the rest in cash. We check weekly to ensure the majority direction doesn’t change. If a short majority direction switches to long, we close our positions and go long in SPY with 100% of the portfolio until the next rebalancing period.

sector rotation: chart return

The strategy provides a positive return of 139.39% which exceeded the S&P 500 return by 78.03%. Below we can notice the strategy behavior for each year.

sector rotation: table returns

The I Know First strategy has an impressive Sharpe ratio (which compares the return of an investment with its risk) of 1.01 and a Sortino ratio (which compares the return of an investment with its given level of downside risk) of 2.37.

sector rotation: risks

I Know First Algorithm – Seeking the Key &  Generating Stock Market Forecast

Stock market predictions: Basic Principle of the "I Know First" Predictive AlgorithmThe I Know First predictive algorithm is a successful attempt to discover the rules of the market that enable us to make accurate stock market forecasts. Taking advantage of artificial intelligence and machine learning and using insights of chaos theory and self-similarity (the fractals), the algorithmic system is able to predict the behavior of over 13,500 markets. The key principle of the algorithm lies in the fact that a stock’s price is a function of many factors interacting non-linearly. Therefore, it is advantageous to use elements of artificial neural networks and genetic algorithms. How does it work? At first, an analysis of inputs is performed, ranking them according to their significance in predicting the target stock price. Then multiple models are created and tested utilizing 15 years of historical data. Only the best-performing models are kept while the rest are rejected. Models are refined every day, as new data becomes available. As the algorithm is purely empirical and self-learning, there is no human bias in the models and the market forecast system adapts to the new reality every day while still following general historical rules.

Sector Rotation: Conclusion

I Know First offers investment solutions for institutional investors, leveraging our advanced self-learning algorithm to gain a competitive advantage. We provide a personalized approach for our institutional clients, enhancing their investment process according to their specific needs and preferences. In this context, we have evaluated the performance of the best sector ETFs portfolio strategy during the period from January 1st, 2020, to May 31st, 2024.

stock market predictions: I Know First Premium article

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Please note-for trading decisions use the most recent forecast.