Sector ETFs

During periods of market stress, assets that normally behave differently often begin to move together. Correlations rise, diversification weakens, and different parts of the equity market increasingly respond to the same underlying risk factors. This raises a practical portfolio-management question: can a sufficiently strong increase in short-term correlations help identify periods when temporarily hedging equity exposure becomes useful?

Our experiment follows the same general research direction but asks a different question. Instead of using correlation primarily as a momentum filter, we test whether an acceleration in correlations across US equity ETFs can act as a practical trigger for temporarily hedging SPY.

We document a persistent intramonth momentum cycle in U.S. sector ETFs that yields meaningful risk-adjusted returns when properly sequenced. Using the nine original Select Sector SPDR ETFs and SPY as the market benchmark from December 1998 through June 2026, we show that trailing 252-day sector momentum generates a positive spread on the first trading day of the month—and then sharply reverses on days two and three. A third, independent leg of the cycle emerges in the window from ten to five trading days before month-end, consistent with the intramonth momentum cycle recently documented at the single-stock level by Nathan, Suominen and Tasa (2026). Stitching the three legs together into a single composite strategy delivers 5.99% annualized return at a 0.55 Sharpe ratio for the long-short variant, and 3.77% at 0.54 for the market-neutral variant—all while being invested fewer than half the trading days each month. Our contribution is twofold: we extend the calendar-anomaly literature from individual equities to sector-level portfolios, and we provide practitioners with a transparent, low-turnover framework that translates these academic patterns into actionable trade schedules.