XLF Financials Sector

## XLF Financials Sector — Full Methodology

### Macro Regime Detection

1. **Yield curve:** Monitor the 10Y–2Y Treasury spread. Steepening yield curve → bullish for banks (wider net interest margins)

2. **Yield curve signal:** Enter long when the 10Y–2Y spread is positive AND rising over the last 30 days

3. **Rate direction:** Fed funds futures must imply ≤ 1 rate hike in the next 3 months (stable/dovish bias)

### Earnings Cycle Overlay

- **Pre-earnings boost:** Financials tend to rally 2–3 weeks before the big bank earnings season (mid-January, mid-April, mid-July, mid-October)

- **Post-earnings drift:** If JP Morgan (JPM) beats EPS estimates, enter XLF within 2 days (sector sympathy)

### Entry Criteria

1. Yield curve is steepening (10Y–2Y positive and rising)

2. XLF price is above its 50-day SMA

3. RSI(14) is between 40 and 65 (not overbought)

4. Enter on the next trading day's open

### Exit Rules

- **Yield curve inversion:** Exit if 10Y–2Y spread turns negative

- **Trailing stop:** 4% below the highest close

- **Time stop:** Reassess after 60 trading days

### Position Sizing

- Risk 1% of portfolio. Sector ETFs carry concentration risk

- Max allocation: 15% of portfolio to XLF

### Best Market Conditions

Works best during economic expansion phases with steepening yield curves. The 2023–2024 period was ideal as rates normalized. Underperforms during yield curve inversions and banking crises (SVB 2023 was a rare exception that caused sharp drawdown).

### Backtest Notes

Tested on XLF daily bars + yield curve data from Jan 2015 to Dec 2024. Yield curve data sourced from FRED. The earnings overlay improved win rate by ~5% over yield curve signals alone.