IWM Small-Cap Rotation

## IWM Small-Cap Rotation — Full Methodology

### Relative Strength Calculation

1. **IWM 3-month return:** Calculate trailing 63-trading-day total return of IWM

2. **SPY 3-month return:** Calculate trailing 63-trading-day total return of SPY

3. **Relative strength ratio:** IWM return / SPY return

### Allocation Rules

- If IWM 3-month return > SPY 3-month return → allocate 100% to IWM

- If SPY 3-month return > IWM 3-month return → allocate 100% to SPY

- If both have negative 3-month returns → allocate 100% to cash (T-bills / SGOV)

- Rebalance on the first trading day of each month

### Risk Overlay

- **Drawdown circuit breaker:** If portfolio drops > 10% in a month, move to 50% cash until next rebalance

- **Volatility filter:** If VIX > 30, reduce position to 50% regardless of rotation signal

### Position Sizing

- 100% of the allocated capital goes into the selected asset

- This is a strategic allocation model, not a trade — size appropriately (25–50% of total portfolio)

### Best Market Conditions

Works best when the size factor is trending (either small-caps or large-caps leading for multiple months). Fed rate cycles drive much of the rotation — rate cuts historically benefit small-caps. Underperforms in rapid back-and-forth rotation environments.

### Backtest Notes

Tested on IWM/SPY monthly data from Jan 2010 to Dec 2024. 180 monthly observations. Turnover is moderate (switches ~4–6 times per year). Tax drag should be considered for taxable accounts.