Catalyst Strategy Overview

Core Strategy Logic

Catalyst is a macro-regime strategy developed by Randy Harris of Dual Momentum Systems. Where most tactical strategies rank assets against each other and hold whichever is winning, Catalyst asks a different question first: what kind of economy are we in right now? It then holds the asset built for that environment. It uses four quadrants like a Permanent Portfolio, but rather than equal weighting all four, it concentrates into the one that fits.

The premise is that a handful of assets have distinct, well-understood relationships to the macro cycle, and that those relationships are stable enough to act on. Energy equities behave one way when inflation is accelerating and growth is intact. Technology behaves very differently. The strategy's job is to identify which economic state is in effect and commit to the asset that suits it.

Catalyst reads two axes at each month end, then holds the resulting allocation for the following month.

The Growth Axis

U.S. large-cap equities (IWB) against their eight-month simple moving average (SMA8). Above the average, growth is up. Below it, growth is down.

This is a monthly measurement, not a daily one. That is deliberate. A trend filter that can flip mid-month and flip back produces more trades and more false signals than one that can only change at month end. The eight-month window was chosen because it is the shortest monthly lookback that responds as quickly as a conventional daily trend filter, and responsiveness matters more here than window length.

The Inflation Axis

This is where Catalyst departs most from convention, in two ways.

First, rather than using published inflation statistics, it reads inflation expectations directly out of the Treasury market. The five-year breakeven rate is what investors collectively expect inflation to average over the next five years, priced continuously by people with money at risk.

Why the bond market rather than the Consumer Price Index? Because published inflation data arrives weeks late and describes what already happened. By the time a CPI print confirms that inflation is accelerating, the assets that benefit have usually already moved. In testing, every backward-looking inflation measure produced materially worse results than the market-based one, and several produced the opposite of the expected relationship.

Second, Catalyst asks two separate questions of that rate rather than one:

• Level. Is the five-year breakeven above the Federal Reserve's 2% target?
• Direction. Is it higher than it was three months ago?

Keeping those separate matters more than it might appear. A single combined test forces an all-or-nothing answer, and inflation frequently sits in a state where the honest answer is "elevated, but no longer building." Treating that as fully inflationary keeps the strategy in energy long after the impulse has faded. Treating it as fully benign abandons energy on every wobble inside an intact inflation regime. Catalyst treats it as its own state and splits the allocation.

The Allocation Table

Growth	Inflation		Allocation
	Level	Direction
Up	Above 2%	Rising	XLE 100%
Up	Above 2%	Falling	XLE 50% / QQQ 50%
Up	Below 2%	either	QQQ 100%
Down	Above 2%	Rising	SGOL 33% / PDBC 33% / DBMF 33%
Down	Above 2%	Falling	SGOL 17% / PDBC 17% / DBMF 17% / CAOS 50%
Down	Below 2%	either	CAOS 100%

XLE is energy equities, QQQ is the Nasdaq-100, SGOL is gold, PDBC is broad commodities, DBMF is managed futures, and CAOS is a tail-risk convexity fund designed to gain when equity markets fall sharply.

Reflation holds energy. Energy equities have historically been the strongest performer in this specific environment by a wide margin. In testing against more than fifty alternative holdings, nothing came close.

Goldilocks holds technology. This is the most common state and where the strategy makes most of its money.

Stagflation holds three assets rather than one. Gold, commodities and managed futures are close to uncorrelated with each other in these months, and managed futures is actually negatively correlated with gold there. Holding all three cuts the volatility of that sleeve by roughly a third against gold alone, improves its worst month, and would have turned a small loss into a double-digit gain during 2022. This is the same reasoning behind the four sleeves of a Permanent Portfolio, applied inside a single quadrant.

Disinflation holds tail-risk convexity. This is the defensive corner, and it is a meaningful departure from conventional versions of this framework, which typically retreat to consumer staples and Treasuries. In testing, long-duration Treasuries were the single worst place to be in the stagflation and disinflation months, which is precisely why they are absent here.

The two split states are not a compromise for its own sake. They are roughly a fifth of all months, so they are a live part of the strategy rather than a rare edge case.

Drift and Rebalancing

Allocations are not reset every month. Between regime changes the holdings drift with the market, and Catalyst only rebalances back to target when a position has moved more than ten percentage points away from it, or when the regime itself changes and a different sleeve is called for.

This matters most in the split states. A 50/50 energy and technology position that runs to 55/45 over a couple of months is left alone; one that reaches 60/40 is reset. The effect on returns is immaterial either way, but it avoids trades that exist only because the calendar turned over, and fewer trades is worth something in a taxable account that a backtest does not capture.

The practical consequence is that the published allocation for a given month may not be exactly 50/50 or exactly a third each. That is intended.

The Circuit Breaker

Catalyst's growth axis watches U.S. large-cap equities, not the asset it happens to be holding. That is intentional, since large-cap equities are the cleanest read on the growth cycle, but it leaves one gap: if the energy position were to fall apart for reasons unrelated to the macro regime, the strategy's own signals would not register it.

A circuit breaker closes that gap. While holding energy outright, if the position falls 15% from its high for that stretch, the strategy moves to the tail-risk hedge instead. It returns to energy once the position has recovered to within 10% of that high. The gap between the two levels is deliberate: a single threshold would flip the position in and out on small moves, while requiring a genuine recovery before re-entry avoids that.

Two things are worth being straightforward about.

It has never triggered. Across 23 years, the deepest decline energy has experienced while held by this strategy is about 10%, so a 15% breaker would have sat dormant the entire time. Every performance figure in this document is identical with and without it. It is insurance against something that has not happened, not a contributor to past returns.

A tighter setting would have hurt. Testing thresholds that do trigger shows them exiting near bottoms rather than ahead of declines, costing return without reducing drawdown. Energy is volatile and pulls back frequently inside intact uptrends, and the macro regime has already filtered out the environments where it genuinely breaks down.

The breaker applies to the full energy position only. A split state is already half in technology, so the concentration risk it exists to cap is halved by construction. It applies to all three variants.

Concentration Is the Point

Catalyst holds either one position or two, never a diversified book. There is no cash sleeve.

This is unusual on this site and worth being explicit about. Most Dual Momentum Systems strategies diversify across sleeves specifically to smooth the ride. Catalyst does the opposite. The reasoning is that the macro regime has already answered the question of what to own, and hedging that answer broadly dilutes it without meaningfully reducing the risk that the regime call itself is wrong.

The split states are not a retreat from that. They exist because the inflation signal genuinely has three states, not because two holdings are safer than one.

The consequence is a strategy with a return profile well above the site's other offerings and a risk profile to match. It is designed to sit alongside a diversified core, not to replace one.

Key Enhancement: Smart Leverage (Catalyst 200 and Catalyst 300)

The base Catalyst strategy is unleveraged. Two leveraged variants apply Smart Leverage to the technology position only:

• Catalyst 200 substitutes a 2X technology position, for up to 200% notional exposure.
• Catalyst 300 substitutes a 3X position, for up to 300%.

Smart Leverage is opportunistic rather than permanent. It arms once technology is 10% or more below its all-time high, deploys only when momentum has genuinely turned back up and the allocation actually contains technology, and exits on a momentum reversal or a hard time limit set at the long-term capital gains boundary. Across the backtest it has been deployed in roughly a quarter of all months.

The arm reference is the all-time high rather than a rolling one, and that is looser than it sounds. QQQ sat more than 10% below its March 2000 peak continuously from September 2000 to June 2014, so for nearly fourteen years of this record the arm condition was permanently satisfied and deployment was gated by the momentum test alone. Rolling reference windows were tested and rejected, costing three and a half points of return at identical maximum drawdown, but the behavior is worth understanding before choosing a leveraged variant.

Leverage follows the technology position wherever it appears, including as half of a split state, so a leveraged cooling month holds energy alongside the leveraged technology position. Any move to a state without technology exits leverage entirely rather than carrying it into a different holding. Testing the alternative, where a live deployment persists through a regime change, produced worse returns and a substantially deeper drawdown, which makes sense: the strategy's own signal is saying the environment has changed.

Performance Highlights

May 2003 through September 2026, net of trading friction:

	CAGR	Max Drawdown	MAR
Catalyst	+24.0%	-14.4%	1.67
Catalyst 200	+32.2%	-17.9%	1.79
Catalyst 300	+40.2%	-27.2%	1.48
S&P 500	+11.3%	-51.0%	0.22

Characteristics worth noting:

• Risk-adjusted return peaks at the 200 variant, not the 300. MAR rises with the first doubling of leverage, then falls back below the unleveraged strategy with the second. The 300 buys a materially higher annualized return and pays for all of it in drawdown and tail risk. See Catalyst 200 and Catalyst 300.
• Two states carry the strategy. Goldilocks and reflation together account for the large majority of months and effectively all of the return.
• The record begins in 2003, not 1980. The breakeven rate Catalyst depends on did not exist before then, and no honest reconstruction is possible. This is a shorter history than other strategies on this site.

Portfolio Characteristics

• High concentration. One or two positions, never a diversified book.
• Low trading frequency. Trades occur when the regime changes, or when a split position drifts more than ten percentage points from target.
• One safety mechanism. A circuit breaker exits the energy position if it declines 15% from its high during a holding stretch. It has never triggered historically.
• Macro-driven, not momentum-driven. Because the selection logic is fundamentally different from the site's trend-following strategies, Catalyst's returns have historically been only loosely correlated with them, which is much of its value in a broader portfolio.
• Shorter history. Twenty-three years rather than forty-six.
• Best suited to tax-deferred accounts. Regime changes produce short-term gains.
• Fully mechanical. Every allocation follows from published rules with no discretionary override.

Who It's For

Catalyst is designed for investors who want:

• High growth potential and are prepared to accept concentration and volatility to get it.
• A return stream that does not depend on the same signals as trend-following strategies.
• A satellite allocation to sit alongside a diversified core.
• A rules-based process with no market-timing judgment calls.
• Optional tactical leverage, via Catalyst 200 or Catalyst 300.

It is a poor fit for investors who need a core holding, who are uncomfortable with a book of one or two positions, who require a long backtest history, or who would struggle to hold through a drawdown approaching 15% in the unleveraged version and nearly 30% in the 300.

Attribution and Lineage

The use of the Breakeven Inflation Rate as a measure of where to be in a Permanent Portfolio style quadrant is fully credited to David Varadi and his Inflation Compass strategy. I had not previously been successful in incorporating the Q's into a strategy to my satisfaction, but David seems to have cracked the code by using the Breakeven Inflation Rate.

Catalyst is not a knock off or a copy of Inflation Compass. Catalyst splits the breakeven level from its direction to create a third inflation state with split allocations, where Inflation Compass is binary. It uses a different market lookback time frame and a different index for the growth axis. Both use Energy and Technology as the growth drivers, but Catalyst uses a three-asset sleeve of gold, commodities and managed futures for stagflation instead of Utilities, and CAOS tail risk instead of Consumer Staples and intermediate-term Treasuries in disinflation. It adds an energy circuit breaker to guard against idiosyncratic risk, and drift bands rather than monthly resets. And in true Dual Momentum Systems fashion, there are two Smart Leverage versions which use QLD and TQQQ when the opportunity presents itself.

David is not the first to use the Breakeven Inflation Rate in a strategy, but as far as I know he is the first in a quadrant style strategy, and kudos for that. Composer has been using the Breakeven Inflation Rate since mid-2013. Macrosynergy since mid-2022. AQR in late 2021 and as early as mid-2010. There may be others who have used it also.

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Past performance, including backtested results, is not indicative of future results. Backtested performance is hypothetical, does not reflect actual trading, and benefits from hindsight in the selection of strategy rules. Portions of the long-term history rely on reconstructed proxy data for funds that did not exist for the full period. Investors should carefully consider their risk tolerance and consult with a financial advisor.

For the latest details, visit www.DualMomentumSystems.com