Sector Rotation Strategies Driven By
News Sentiment Indices
Published Date: November 4, 2009
Author: Peter Ager Hafez
The study provides insights into how RavenPack News Scores can be used in profitable sector rotation trading strategies.
This paper presents a methodology for constructing industry sentiment indices based on news sentiment.
Such indices prove to be a valuable input into sector rotation strategies, thereby allowing sentiment
to help anticipate which industries or companies will be successful in the upcoming stages of an economic
cycle. Results indicate that negative sentiment is a strong leading indicator of future underperformance,
while positive sentiment is not considered as clear a leading indicator of future outperformance. The study
shows how news sentiment helps reduce risk while improving cumulative returns when constructing industry
rotation strategies. During the test period of February 2005 through September 2009, using news sentiment
instead of one-month return momentum improved annualized returns from 18.49% to 29.63%, and the Information
ratio from 0.95 to 1.80. Further results indicate that tracking the sentiment of Top and Bottom industries
could add value in detecting periods of stronger positive or negative sentiment environments. Such strategy
could provide greater confidence in trading the market more aggressively, thereby allowing sentiment to
define the magnitude of one's investment exposure.