Defense First (DEF_FIRST)
Developed by Thomas Carlson · Inverted Momentum · Med Risk
Defense First was developed by Thomas Carlson and published as SSRN paper #5334772, introducing a contrarian approach to tactical allocation that inverts the conventional momentum logic. Where most tactical strategies buy assets with the strongest positive momentum and sell those with weakening trends, Defense First monitors the momentum of traditionally defensive assets — long-term Treasuries, gold, and commodities — and uses their weakening momentum as a signal that the economic environment favors equities. The strategy buys stocks when defensive assets are losing momentum, reasoning that declining demand for safe havens indicates growing confidence in economic expansion.
This inverted logic is grounded in a specific market dynamic: when investors sell bonds, gold, and commodities, it typically signals that they are rotating into equities because they perceive improving economic conditions, rising corporate earnings, or diminishing recession risk. Conversely, when defensive assets gain momentum, it suggests investors are seeking protection — a signal that equity conditions may be deteriorating. Defense First systematically captures this rotation signal, positioning in equities when the crowd is moving away from safety.
The strategy holds a permanent portfolio of four defensive assets — long-term Treasuries (TLT), gold (GLD), commodities (DBC), and a fourth diversifying position — with a conditional substitution mechanism. Each defensive asset is scored using the 13612U multi-period momentum composite. When enough defensive assets show negative momentum (indicating investors are selling safe havens), the strategy substitutes US equities (SPY) into the portfolio, replacing the weakest defensive positions.
The allocation approach uses fixed tiers rather than equal weighting, assigning predetermined proportional weights to the selected positions. This tiered approach allows the portfolio to express varying levels of conviction across its holdings while maintaining a structural framework that doesn't change with each month's rankings. The result is a strategy whose equity allocation rises when the market is rotating out of safe havens and falls when defensive assets are in demand — a naturally contrarian positioning that can complement conventional momentum strategies.
How It Works
Monitoring Defensive Asset Momentum
Each month, the strategy evaluates the 13612U momentum composite — the average of one, three, six, and twelve-month returns — for each of its defensive universe members: long-term Treasuries (TLT), gold (GLD), and commodities (DBC). These assets represent the three primary safe-haven categories: government duration, precious metals, and real assets. Their collective momentum behavior provides a comprehensive reading of market risk appetite.
When defensive assets have strong positive momentum, investors are actively seeking safety — implying concern about equity markets. When defensive assets show negative momentum, investors are liquidating safe-haven positions — typically rotating capital back into equities as economic confidence improves. Defense First uses this second condition as its equity entry signal, interpreting declining demand for protection as a positive indicator for risk assets.
The Inverted Signal Logic
The strategy inverts conventional momentum wisdom. Where standard approaches buy assets showing strength and sell those showing weakness, Defense First buys equities specifically when defensive assets are weak. When enough of the defensive universe shows negative 13612U scores, the strategy replaces the weakest-scoring defensive position with US equities (SPY), increasing equity exposure when the crowd is moving away from protection.
When defensive assets regain momentum — indicating renewed demand for safety — the equity allocation is removed and replaced by the recovering defensive asset. This produces a strategy that is naturally long equities during periods of rising risk appetite and naturally long safe havens during periods of rising risk aversion. The timing of equity entry and exit is driven entirely by the behavior of the defensive universe rather than by equity market indicators themselves.
Fixed-Tier Allocation
Rather than equal-weighting, the portfolio uses fixed proportional tiers that assign predetermined weights to each position based on its role in the portfolio. This tiered approach maintains a structural allocation framework that doesn't change with each month's rankings, reducing the turnover that would result from continuously re-optimizing weights. The tiers reflect the strategy's design philosophy: the core defensive holdings provide a permanent ballast, while the equity substitution provides conditional upside exposure during favorable conditions.
The inverted signal produces a strategy whose behavior is fundamentally different from — and potentially uncorrelated with — conventional momentum strategies. During periods when standard momentum strategies are exiting equities due to declining price trends, Defense First may be entering equities if the exit from safe havens signals improving conditions. This structural negative correlation with conventional approaches makes Defense First a valuable diversifier within multi-strategy portfolios.
Explore Defense First (DEF_FIRST)
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