Monthly Momentum in S&P 500 and Treasury Bonds (Bond Rotation Strategy in SPY and TLT)

TLT vs SPY – Bond Rotation Strategy. Some days ago we published an ETF rotation strategy that rotates between SPY, TLT, and EEM based on monthly momentum. Today we look at a similar ETF sector momentum/rotation strategy but we exclude EEM: A SPY and TLT strategy (S&P 500 and 20 years Treasury bond).

The SPY and TLT rotation trading strategy might work well because TLT often works as a safe haven when the stock market is weak. Below you find the logic and code for this simple SPY and TLT momentum/rotation strategy. The drawdown is low but the total return is better than “buy and hold”. 

What is momentum and how has it performed?

Momentum is a well-known strategy that has performed well for many decades. It doesn’t work on long timeframes, but best on semi-long timeframes from 1 to 12 months.

For example, one strategy that has performed well is to buy the stocks that have performed the best over the last six months. At the end of every month, you rank the best stocks and buy the best x stocks and hold them for one month. At the end of next month, you rank again. Rinse and repeat every month going forward.

The only drawbacks with momentum strategies are big drawdowns and survivorship bias:

• How to deal with drawdowns
• Survivorship bias in backtesting, trading, and investing

What is sector rotation?

Sector rotation is changing assets tactically when you sell one asset and buy another one. Switching between SPY and TLT is a perfect example of sector rotati