Adapting to Volatility: A Regime-Switching Momentum-Reversal Strategy for Alpha

Can a strategy that adapts to market regimes outperform traditional momentum or reversal models?

In this article, I explore a volatility-conditioned approach to equity return prediction, using nearly three decades of U.S. stock market data. By allowing the strategy to switch between momentum and reversal depending on the prevailing volatility state, I show that it’s possible to significantly improve both Sharpe ratios and alpha—without introducing undue complexity or overfitting. This regime-aware framework proves especially valuable in periods of macroeconomic stress and uncertainty, where many signals break down. For portfolio managers and systematic investors alike, this study offers a compelling alternative to static trading rules—and a blueprint for building more robust strategies in today’s increasingly dynamic market environment.