Blog - Investing Notes

How sensitive is the performance of “Doing Momentum with Style (ETFs)” to selecting ranks other than winners and to choosing a momentum ranking interval other than six months? This strategy each month ranks the following six style exchange-traded funds (ETF) on past return and rotates to the strongest style:

iShares Russell 1000 Value Index (IWD) – large capitalization value stocks.
iShares Russell 1000 Growth Index (IWF) – large capitalization growth stocks.
iShares Russell Midcap Value Index (IWS) – mid-capitalization value stocks.
iShares Russell Midcap Growth Index (IWP) – mid-capitalization growth stocks.
iShares Russell 2000 Value Index (IWN) – small capitalization value stocks.
iShares Russell 2000 Growth Index (IWO) – small capitalization growth stocks.

Available data are so limited that sensitivity test results may mislead. With that reservation, we perform two robustness/sensitivity tests: (1) comparison of returns for all six ranks of winner through loser based on a ranking interval of six months and a holding interval of one month (6-1); and, (2) comparison of winner returns for ranking intervals ranging from one to 12 months (1-1 through 12-1) and for a six-month lagged six-month ranking interval (12:7-1) per “Isolating the Decisive Momentum (Echo?)”, all with one-month holding intervals. Using monthly adjusted closing prices for the style ETFs and SPDR S&P 500 (SPY) over the period August 2001 through April 2012 (129 months), we find that: More…

“Beat the Market with Hot-Anomaly Switching?” concludes that “a trader who periodically switches to the hottest known anomaly based on a rolling window of past performance may be able to beat the market. Anomalies appear to have their own kind of momentum.” Does momentum therefore work for style-based exchange-traded funds (ETF)? To investigate, we apply a simple momentum strategy to the following six ETFs that cut across market capitalization (large, medium and small) and value versus growth:

iShares Russell 1000 Value Index (IWD) – large capitalization value stocks.
iShares Russell 1000 Growth Index (IWF) – large capitalization growth stocks.
iShares Russell Midcap Value Index (IWS) – mid-capitalization value stocks.
iShares Russell Midcap Growth Index (IWP) – mid-capitalization growth stocks.
iShares Russell 2000 Value Index (IWN) – small capitalization value stocks.
iShares Russell 2000 Growth Index (IWO) – small capitalization growth stocks.

The simple (6-1) strategy allocates all funds each month to the one style ETF with the highest total return over the past six months. A six-month ranking period is intuitively large enough to gauge style momentum but small enough to react to changes in business conditions that might favor one style over others. An alternative, more cautious strategy allocates at the end of each month all funds either to the style ETF with the highest total return over the past six months or to cash depending on whether the S&P 500 Index is above or below its 10-month simple moving average (6-1;SMA10). Using monthly adjusted closing prices for the style ETFs, the S&P 500 index, 3-month Treasury bills (T-bills) and S&P Depository Receipts (SPY) over the period August 2001 through April 2012 (129 months, limited by data for IWS and IWP), we find that: More…

Readers have proposed several hedging/shorting variations for “Simple Sector ETF Momentum Strategy Performance”, as follows: (1) buy the top and hedge with (short) the bottom sector based on past six-month return; (2) buy the top sector based on past six-month return and hedge it with a matched short position in the S&P 500 Index via ProShares Short S&P500 (SH); and, (3) buy the top (sell the bottom) sector when the S&P 500 Index is above (below) its 10-month simple moving average (SMA). The strategies apply to the following nine sector exchange-traded funds (ETF) defined by the Select Sector Standard & Poor’s Depository Receipts (SPDR), all of which have trading data back to December 1998:

Materials Select Sector SPDR (XLB)
Energy Select Sector SPDR (XLE)
Financial Select Sector SPDR (XLF)
Industrial Select Sector SPDR (XLI)
Technology Select Sector SPDR (XLK)
Consumer Staples Select Sector SPDR (XLP)
Utilities Select Sector SPDR (XLU)
Health Care Select Sector SPDR (XLV)
Consumer Discretionary Select SPDR (XLY)

Using monthly dividend-adjusted closing levels for the sector ETFs, SPDR S&P 500 (SPY), SH (as available) and the 3-month Treasury bill (T-bill) yield over the period December 1998 through April 2012 (161 months), we find that: More…

Readers have suggested three alternative metrics for the strategy tested in the “Simple Sector ETF Momentum Strategy Performance”: (1) Sharpe Ratio over the past six months; (2) slope of price over the past six months; and, (3) average of three-month, six-month and 12-month past returns. Do these metrics outperform past six-month return in a momentum strategy applied to the following nine sector exchange-traded funds (ETF) defined by the Select Sector Standard & Poor’s Depository Receipts (SPDR), all of which have trading data back to December 1998:

Materials Select Sector SPDR (XLB)
Energy Select Sector SPDR (XLE)
Financial Select Sector SPDR (XLF)
Industrial Select Sector SPDR (XLI)
Technology Select Sector SPDR (XLK)
Consumer Staples Select Sector SPDR (XLP)
Utilities Select Sector SPDR (XLU)
Health Care Select Sector SPDR (XLV)
Consumer Discretionary Select SPDR (XLY)

The three alternative strategies are, at the end of each month, allocate all funds to the sector ETF with the highest: (1) monthly Sharpe Ratio over the past six months (SR6-1); (2) monthly price slope over the past six months (Slope6-1); and, (3) average of past three-month, six-month and 12-month past total returns (3-1;6-1;12-1). For comparison, we include the strategy of monthly allocation to the sector ETF with the highest total return over the past six months (6-1). Using monthly dividend-adjusted closing prices for the nine sector ETFs over the period December 1998 through April 2012 (161 months), we find that: More…

How sensitive is the performance of the “Simple Sector ETF Momentum Strategy” to selecting ranks other than winners and to choosing a momentum ranking interval other than six months? This strategy each month ranks the following nine sector exchange-traded funds (ETF) on past return and rotates to the strongest sector:

Materials Select Sector SPDR (XLB)
Energy Select Sector SPDR (XLE)
Financial Select Sector SPDR (XLF)
Industrial Select Sector SPDR (XLI)
Technology Select Sector SPDR (XLK)
Consumer Staples Select Sector SPDR (XLP)
Utilities Select Sector SPDR (XLU)
Health Care Select Sector SPDR (XLV)
Consumer Discretionary Select SPDR (XLY)

Available data are so limited that sensitivity test results may mislead. With that reservation, we perform two robustness/sensitivity tests: (1) comparison of returns for all nine ranks of winner through loser based on a ranking interval of six months and a holding interval of one month (6-1); and, (2) comparison of winner returns for ranking intervals ranging from one to 12 months (1-1 through 12-1) and for a six-month lagged six-month ranking interval (12:7-1) per “Isolating the Decisive Momentum (Echo?)”, all with one-month holding intervals. Using monthly adjusted closing prices for the sector ETFs and SPDR S&P 500 (SPY) over the period December 1998 through April 2012 (161 months), we find that: More…

Do simple momentum trading strategies applied to major U.S. stock market sectors outperform reasonable benchmarks? To investigate, we apply three simple momentum strategies to the nine sector exchange-traded funds (ETF) defined by the Select Sector Standard & Poor’s Depository Receipts (SPDR):

Materials Select Sector SPDR (XLB)
Energy Select Sector SPDR (XLE)
Financial Select Sector SPDR (XLF)
Industrial Select Sector SPDR (XLI)
Technology Select Sector SPDR (XLK)
Consumer Staples Select Sector SPDR (XLP)
Utilities Select Sector SPDR (XLU)
Health Care Select Sector SPDR (XLV)
Consumer Discretionary Select SPDR (XLY)

The three strategies are: (1) allocate all funds at the end of each month to the sector ETF with the highest total return over the past six months (6-1); (2) allocate all funds at the end of each month to the sector ETF with the highest total return over the six months ending the prior month (6-1;1), hypothesizing that the skip-month avoids short-term reversals; and, (3) more cautiously, allocate all funds at the end of each month either to the sector ETF with the highest total return over the past six months or to cash depending on whether the S&P 500 Index is above or below its 10-month simple moving average (6-1;SMA10). A six-month ranking period is intuitively large enough to gauge sector momentum but small enough to react to changes in business conditions that might favor one sector over others. Using monthly adjusted closing prices for the sector ETFs, the S&P 500 index, 3-month Treasury bills (T-bills) and S&P Depository Receipts (SPY) over the period December 1998 through April 2012 (161 months), we find that: More…

Many stock market experts cite the year (1, 2, 3 or 4) of the U.S. presidential term cycle as a useful indicator of U.S. stock market returns. Game theory suggests that presidents deliver bad news immediately after being elected and do everything in their power to create good news just before ensuing biennial elections. Are some presidential term cycle years reliably good or bad? If so, are these abnormal returns concentrated in certain quarters? Finally, what does the stock market do in the period immediately before and after a national election? Using S&P 500 Index data from January 1950 through April 2012 (over 62 years and 15 presidential terms) and focusing on “political quarters” (Feb-Apr, May-Jul, Aug-Oct and Nov-Jan), we find that: More…

The business media and expert commentators sometimes cite the U.S. unemployment rate as an indicator of economic and stock market health, generally interpreting a jump (drop) in the unemployment rate as bad (good) for stocks. Is this indicator in fact predictive of U.S. stock market behavior in subsequent months, quarters and years? Using the monthly unemployment rate from the Bureau of Labor Statistics and contemporaneous S&P 500 Index data for the period January 1950 through March 2012 (747 months), we find that: More…

U.S. job gains or losses are a prominent element of the monthly investment-related news cycle, with the the business media and expert commentators generally interpreting changes in employment as an indicator of future economic and stock market health. One line of reasoning is that jobs generate personal income, which spurs personal consumption, which boosts corporate earnings and lifts the stock market. Are these data in fact predictive of U.S. stock market behavior in subsequent months, quarters and years? Using monthly seasonally adjusted nonfarm employment data from the Bureau of Labor Statistics and contemporaneous S&P 500 Index data for the period January 1950 through March 2012 (747 months), we find that: More…

What works for value stock investors? In his April 2012 paper entitled “Value Investing: Investing for Grown Ups?”, Aswath Damodaran explores success factors for three distinct types of value investing: (1) mechanical screening for stocks with value characteristics such as low earnings multiple, high book-to-market ratio and high return on investment; (2) taking contrarian positions in fallen, unpopular stocks; and, (3) buying large positions in poorly managed, low-valued companies and actively driving turnarounds. Using quantitative examples for U.S. stocks for all three types of value investing, he concludes that: More…