Fuel-and-Spark Position Sizing Model
Combine supportive conditions with momentum to determine conviction and position size
- Difficulty
- Moderate
- Time to result
- ~weeks to results
- Steps
- 6
- Confidence
- 98%
Divide evidence into two groups. Conditional factors—such as valuation, credit, sentiment, seasonality, and fundamental data—represent the fuel available for a sustained move. Trend and momentum represent the spark that starts and maintains that move. A market with abundant fuel and a hot spark supports a larger, higher-conviction position. A market with positive momentum but little fuel may still be tradable, yet it warrants a smaller position and lower expectations for duration or magnitude. Favorable conditions without a spark call for patience because cheapness or supportive credit alone does not establish that prices have turned. Position size is therefore an output of evidence alignment rather than confidence, narrative intensity, or a binary buy-or-sell opinion.
Origin
Extracted from Masters in Business, where Jeff deGraaf used an engine analogy to explain how Renaissance Macro combines conditional factors with trend and momentum.
Core principles
- 01Conditions determine how far a move can travel
- 02Trend and momentum determine whether the move has ignited
- 03Neither conditions nor momentum is sufficient alone
- 04Stronger alignment justifies greater position size
- 05Weak fuel calls for participation without maximum conviction
How to run it
- 1
Measure the fuel
Assess valuation, credit, sentiment, seasonality, and other fundamental conditions. Summarize how strongly they support a bull or bear phase.
Pro tip Keep each factor separately scored so one vivid datapoint cannot dominate the assessment.
Watch out Supportive conditions can persist without producing an immediate price move.
- 2
Measure the spark
Determine whether trend and momentum confirm that prices are moving in the expected direction. Look for evidence of initiation or continuation.
Pro tip Use breadth or thrust measures to distinguish a genuine ignition from an isolated bounce.
Watch out A compelling valuation is not a substitute for evidence that the market has turned.
- 3
Classify the combination
Place the market into one of four states: strong fuel and spark, strong fuel without spark, weak fuel with spark, or neither. Let this state constrain the available actions.
Pro tip Use consistent thresholds so classifications can be tested historically.
Watch out Do not quietly change thresholds to accommodate a preferred narrative.
- 4
Set conviction and duration
Expect stronger and more durable moves when fuel and spark align. Treat momentum with weak conditions as a shorter or less reliable opportunity.
Pro tip Document what kind of historical move the current combination resembles.
Watch out A hot spark with little fuel should not be presented as a generational turning point.
- 5
Size the position
Allocate more risk when conditions and momentum strongly agree, less when only one side supports the trade, and none when neither does. Keep the maximum loss inside the portfolio's risk budget.
Pro tip Translate each combination into a predefined position-size range.
Watch out Do not turn a modest tactical signal into a full strategic allocation.
- 6
Monitor fuel and spark separately
Track whether conditions are improving or deteriorating and whether momentum persists. Resize the position as the combination changes.
Pro tip A credit improvement preceding an equity turn can provide early evidence, but wait for the spark before making the largest call.
Watch out Monitoring only price can miss deteriorating capacity for continuation.
In the wild
Credit markets had begun healing months before equities reached their low, while sentiment and risk-adjusted returns reflected severe capitulation. Those conditions supplied fuel, but deGraaf still waited for broad market thrust in early March to provide the spark. The combination supported a stronger equity call than either signal could have justified independently.
→ Improving conditions plus market breadth identified the potential for an impressive rally.
A broad equity index retains positive momentum, yet valuation, credit creation, and excess-return history indicate limited remaining fuel. The portfolio manager participates because the near-term path remains positive but uses a smaller allocation and avoids describing the move as a historic long-term opportunity.
→ The portfolio captures tactical upside while limiting exposure to a lower-quality continuation.
Common mistakes
Using valuation as a timing signal
Attractive valuation can provide fuel, but it does not show that buyers have ignited a new trend.
Equating momentum with unlimited upside
A hot spark can drive a move temporarily even when the available fuel implies limited duration or magnitude.
Sizing from conviction alone
Position size should reflect measured alignment between conditions and momentum, not the analyst's confidence or eloquence.
Is it for you?
Best for
It is best for portfolio managers deciding how aggressively to express a bullish or bearish market view.
Not ideal for
It is not ideal for decisions based solely on security-specific cash flows with no meaningful market-timing component.
From the transcript
“Think about it. If you will like the amount of gas in the tank, it sort of tells you how far you can go.”
“The other side of that is momentum and trend, and we think about that is how hot the spark is in the engine.”
“Each one of these independently is useless, right, But it's the combination of both that's important.”
From the episode
Interview With Jeff deGraaf: Masters in Business (Audio)