How does the UPRO/TQQQ rotation decide what to hold?

Monthly, it checks four conditions (VIX, S&P 500 vs its 200-day average, emerging-market and bond momentum): all true means 50% UPRO and 50% TQQQ, one or two false means 50% QQQ and 50% SPY, three or four false means TLT.

Alvarez: UPRO/TQQQ monthly rotation (a reader’s strategy)

Cesar Alvarez, Alvarez Quant Trading, post of 27 March 2024; the strategy was sent to him by a reader

AA — the trader’s own published text (rule document, own site) was read.

Monthly rotation between 3x ETFs on the S&P 500 and Nasdaq-100, unleveraged ETFs and bonds. A four-condition monthly rule that puts half the money in TQQQ and half in UPRO when all conditions hold. The reason to read it is the author’s checklist of doubts: a 54% drawdown, −48% in 2022, and how easily a strategy like this is overfitted.

A published rule is a hypothesis, not evidence of profit. We do not know how often these rules won, and traders who publish their methods are the ones who survived.

Sources

UPRO/TQQQ Leveraged ETF Strategy (Alvarez Quant Trading), 27 Mar 2024 — own site, 2024
The text of the post was read; the variation tables are images and were not read.

Rules

Filter

FilterEvaluate on the last trading day of each calendar month and trade at the next open. Four conditions: A — VIX at or below 25; B — the S&P 500 above its 200-day average; C — VWO (emerging markets) with positive 1-3-6-12 week momentum; D — BND (US bonds) with positive 1-3-6-12 week momentum.
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FilterThe momentum score averages the 1-month return × 12, the 3-month × 4, the 6-month × 2 and the 12-month return. Test period 1 January 2010 – 31 December 2023.
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Entry

EntryAll four true: 50% UPRO (3x S&P 500) and 50% TQQQ (3x Nasdaq-100).
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EntryOne or two false: 50% QQQ and 50% SPY. Three or four false: 100% TLT (long Treasury bonds).
[1]

Discipline

DisciplineReported with the original settings: an annual return of 24.4 and a maximum drawdown of 54; the year 2022 returned −48%, and 2023 returned +64%.
[1]
DisciplineHis doubts: overfitting is easy and the number of combinations tried and the test dates are unknown; an emerging-markets filter for US ETFs looks odd; picking TQQQ is an obvious choice with hindsight; he asks whether in-sample and out-of-sample tests were done; a 54% drawdown would be hard to live with; defaulting to TLT worked in the long bond bull market but hurt in 2022.
[1]

Not confirmed

Often attributed to this trader, but not found in the sources above. Not listed as his or her rules.

The tables of variations are images and were not read; a reader’s comment that requiring the S&P 500 condition for 10 days in a row makes the signal more reliable is unverified, and the author only said he would test it.

Limits of these rules

This is not a recommendation: the post is a review of someone else’s backtest, the numbers are from one run on one 14-year history that began after the 2008 crash, and the author himself calls the drawdown and the 2022 loss hard to tolerate. Leveraged ETFs also decay when held through volatile sideways markets.

Other traders

Rules are our paraphrase of the sources; only short quotes are verbatim. This is information, not advice or a promise of profit.