Canary Signal Series: High Beta vs. Low Vol

How the SPHB/SPLV Ratio Might Just Be Your New Favorite Market Thermometer

Lately I stumbled across a post (somewhere in the internet rabbit hole—credit to the mystery author!) that compared two ETFs I only half‑remembered: SPHB, which holds the 100 highest‑beta names in the S&P 500, and SPLV, which holds the 100 lowest‑volatility names. The idea felt obvious in hindsight: when the raciest stocks are outrunning the sleepiest ones, the market is probably feeling frisky. Why not track the price ratio of the two as a canary?

📣 Usual disclaimer: None of this is financial advice. Kick the tires yourself and talk to a pro before committing real money.

The Basic Momentum Play

I dropped the ratio into QuantMage, slapped a simple 12‑month SMA‑momentum rule on it, and—voilà:

Not too shabby! We’re looking at a 9.9% annual return with just an 11% max drawdown over 13 years – and the strategy was only in the market 54.5% of the time. Getting a Sharpe Ratio above 1.0 with a single binary signal? That’s like finding a $20 bill in your old jacket pocket.

The logic here is beautifully simple: when the wild children (high beta) are outperforming the steady eddies (low vol), it’s party time in the market.

Making It More Reliable

Adding a simple twist—requiring the momentum signal to persist for two consecutive days—significantly smoothed the ride:

Better risk-adjusted return, fewer whipsaws. Sometimes, patience pays.

Time Travel with Correlated Tickers

Unfortunately, SPHB and SPLV don’t go far enough back to cover the 2008 GFC. So I used QuantMage’s Correlated Tickers tool to find proxies:

SPHB → RSPT

SPLV → FTCS

With these substitutes, I could stretch the backtest to 17 years:

The results weren’t quite as sparkly, but still solid enough to keep me interested. More importantly, it gave me confidence that this wasn’t just a post-2010 phenomenon.

Building a Risk‑Off Sleeve: Gold

Routing capital to IAU (gold) when the signal is risk‑off nudged returns higher—at the cost of a bit more bumpiness:

Turning Up the Heat

Want to live dangerously? Replace SPY with QQQ (the tech-heavy Nasdaq ETF):

Still not spicy enough? Try QLD, which is basically QQQ on steroids (2x levered):

Now we’re cooking with gas – 33.1% annual returns with a 24.5% max drawdown over 13 years. Of course, betting on continued tech dominance might be a bit like assuming your favorite sports team will keep winning forever. But hey, it’s been working so far!

Give it a spin yourself here.

The Power Combo

Pair the canary with my recently shared RSI Ensemble (a mean‑reversion filter) and the curve really takes off:

CAGR 59.5 % against 22.2 % drawdown—proof that uncorrelated edges can be rocket fuel.

Try the combo strategy here.

Bottom Line

• Core thesis: When high‑beta leads low‑vol, the crowd is reaching for risk. The ratio is a neat single‑line risk‑on/off toggle.

• Durability: Will it keep its edge? Only the future knows. Longer, out‑of‑sample regimes (think 2000–02 or 1970s style stagflation) would be instructive.

• Overfit watch: The fancier combos (QQQ, QLD, RSI mash‑ups) pack extra assumptions. Treat them as hypotheses, not gospel.

• Your turn: What uncorrelated filters or asset sleeves would you bolt on—commodities, managed futures, something weird? How would you tame that drawdown without killing the juice?