{"id":961,"date":"2025-08-13T14:00:00","date_gmt":"2025-08-13T14:00:00","guid":{"rendered":"https:\/\/www.tejwin.com\/en\/insights\/turning-sector-rotation-into-strategy-applying-industry-sequencing-to-build-a-quantitative-backtesting-model\/"},"modified":"2025-08-13T14:00:00","modified_gmt":"2025-08-13T14:00:00","slug":"turning-sector-rotation-into-strategy-applying-industry-sequencing-to-build-a-quantitative-backtesting-model","status":"publish","type":"insight","link":"https:\/\/www.tejwin.com\/en\/insights\/turning-sector-rotation-into-strategy-applying-industry-sequencing-to-build-a-quantitative-backtesting-model\/","title":{"rendered":"Turning Industry Rotation into Alpha: A Quant Backtest Strategy"},"content":{"rendered":"
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Photo by Christian Wiediger<\/a> on Unsplash<\/a><\/figcaption><\/figure>\n

Introduction<\/strong><\/h2>\n

In our previous article\u201d Shipping Leads, Semiconductors Follow? <\/a><\/strong> \u201cwe identified a recurring pattern in Taiwan\u2019s market: rallies in the shipping sector <\/strong><\/mark>often precede gains in semiconductor stocks<\/mark><\/strong>. This article builds on that insight by transforming the observed rotation sequence into a quantitative investment strategy.<\/p>\n

By combining sector momentum signals, macroeconomic indicators, and rule-based allocation logic, we construct a backtesting model to simulate historical trades. The goal is to evaluate whether this \u201cShipping \u2192 Semiconductors\u201d signal\u2014when used within a broader economic context\u2014can deliver consistent excess returns.<\/p>\n

Visualization of Industry RSI Values<\/h2>\n

<\/strong><\/p>\n

From the analysis presented in the previous article, covering the period from 2012 to early 2020, we can observe a clear rotational relationship between the RSI values of the shipping and semiconductor industries. The next step is to consider how we can leverage this rotational pattern to design a reliable investment strategy. To avoid look-ahead bias, we use post-2020 market data as the subject of our backtesting research, which makes our strategy analysis more robust.<\/p>\n

Strategy Logic Explanation: (Combined with Economic Signal Lights)<\/strong><\/h2>\n

From the article\u00a0\u201cFrom Business Cycle Signal Lights to Asset Rotation<\/strong><\/a>\u201d<\/em>we learned that monitoring indicators can effectively help avoid bear market volatility\u2014holding equities only during bull markets and switching to short-term government bonds or other defensive assets during bear markets<\/mark><\/strong>\u2014while producing favorable backtesting results.<\/p>\n

Incorporating the observed sector rotation phenomenon\u00a0\u201cShipping \u2192 Semiconductors,\u201d<\/em>\u00a0our strategy proposes that during bull market phases, once a sector rotation signal is detected, the originally held 0050 ETF is temporarily substituted with semiconductor-related stocks. After capturing the excess returns generated from capital rotation, the position is rotated back into the 0050 ETF. The expectation is that this dynamic allocation approach will further enhance the performance outcomes discussed in the earlier study. For benchmarking, the strategy is compared against the TAIEX Total Return Index (IR0001), hereafter referred to as the market index.<\/p>\n

Operational Logic:<\/strong>
The strategy activates under two conditions: a bullish macroeconomic phase and a sector rotation signal.<\/p>\n

When the monitoring indicator signals an upward phase, if the RSI value of the shipping index rises above 65 (indicating that the sector is at a relative high point and the rotation cycle is likely beginning), we initiate positions in representative semiconductor-related stocks. <\/p>\n

The holdings are maintained until the RSI of the semiconductor index increases by 15 points relative to the entry level (signaling the end of the rotation), at which point the semiconductor positions are closed and rotated back into the 0050 ETF. <\/p>\n

If the market transitions into a bear phase before the rotation cycle completes, all equity positions are liquidated and shifted into short-term bonds, consistent with the design outlined in the business cycle strategy.<\/p>\n

Semiconductor Allocation:<\/strong>
For exposure to the semiconductor sector, we construct a basket of ten representative Taiwan\u2019s semiconductor companies, spanning the full supply chain from upstream foundries to midstream IC design and downstream packaging, testing, and memory:<\/p>\n