Momentum Investing

Do alternative “Cash” (deemed risk-free) instruments materially affect performance of the “Simple Asset Class ETF Momentum Strategy” (SACEMS)? Changing the proxy for Cash can affect how often the model selects Cash, as well as the return on Cash when selected. To investigate, we test separately each of the following yield and exchange-traded funds (ETF) as the risk-free asset:

• 3-month Treasury bills (Cash), a proxy for the money market as in base SACEMS
• SPDR Bloomberg Barclays 1-3 Month T-Bill (BIL)
• iShares 1-3 Year Treasury Bond (SHY)
• iShares 7-10 Year Treasury Bond (IEF)
• iShares TIPS Bond (TIP)

We focus on compound annual growth rate (CAGR) and maximum drawdown (MaxDD) as key performance metrics and consider Top 1, equally weighted (EW) EW Top 2 and EW Top 3 SACEMS portfolios. Using end-of-month total (dividend-adjusted) returns for the specified assets during February 2006 (except May 2007 for BIL) through October 2022, we find that:

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A subscriber asked about an update of “Simplest Asset Class ETF Momentum Strategy?”, which each month holds SPDR S&P 500 ETF Trust (SPY) or iShares 20+ Year Treasury Bond (TLT)  depending on which has the higher total return over the last three months, including a direct comparison to a portfolio that each month allocates 50% to Simple Asset Class ETF Value Strategy (SACEVS) Best Value and 50% to Simple Asset Class ETF Momentum Strategy (SACEMS) equal-weighted (EW) Top 2. We begin the test at the end of June 2006, limited by SACEMS inputs. We ignore monthly switching frictions for both strategies. Using monthly dividend-adjusted prices for SPY and TLT starting March 2006 and monthly gross returns for 50-50 SACEVS Best Value and SACEMS EW Top 2 starting July 2006 (limited by SACEMS inputs), all through October 2022, we find that: Keep Reading

Does combining a sentiment indicator with a trend following indicator improve performance of a stocks-bonds timing strategy? In his October 2022 paper entitled “The Complementarity of Trend Following and Relative Sentiment”, Raymond Micaletti investigates effects of combining the following trend following (TF) and relative sentiment (RS) indicators:

• TF – at the end of each month switch to a broad U.S. stock market index (an aggregate bond index) when the prior-close stock market index crosses above (below) its 10-month simple moving average (SMA) strategy. This strategy is the best of six similar SMA strategies.
• RS – each week update the equity allocation from 0% to 100% based on an equal-weighted combination of three prior-week inputs, two of which are driven by weekly Commitments of Traders reports and one of which is driven by monthly Sentix relative sentiment, with the balance of the portfolio in an aggregate bond index. Update the equity allocation only if it differs from the prior allocation by more than 10%.

The combined strategy (TFRS) is a 50-50 mix of TF and RS. He applies frictions of 0.04% to account for costs of both stock and bond index allocation changes. For interpretation of results, he focuses on nine times the equity index suffers a drawdown of at least 10% from an all-time high. Using daily U.S. equity market total returns and U.S. Treasury bill yields (for Sharpe ratio calculations) from the Kenneth French data library, daily levels of Bloomberg Barclays U.S. Aggregate Bond Total Return Index, weekly Commitments of Traders reports and the monthly Sentix economic outlook survey of institutional and individual investors during November 1994 through August 2022, he finds that: Keep Reading

Is there a best time of the month for measuring momentum within the Simple Asset Class ETF Momentum Strategy (SACEMS)? To investigate, we compare 21 variations of baseline SACEMS by shifting the monthly return calculation cycle from 10 trading days before the end of the month (EOM) to 10 trading days after EOM. For example, an EOM+5 cycle ranks assets based on closing prices five trading days after EOM each month. We focus on gross compound annual growth rate (CAGR) and gross maximum drawdown (MaxDD) as key performance statistics for the Top 1, equally weighted (EW) Top 2 and EW Top 3 portfolios of monthly winners. Using daily dividend-adjusted prices for SACEMS assets during mid-February 2006 through mid-October 2022, we find that:

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Subscribers have questioned selecting assets with negative past returns within the “Simple Asset Class ETF Momentum Strategy” (SACEMS). Inclusion of Cash as one of the assets in the SACEMS universe of exchange-traded funds (ETF) prevents the SACEMS Top 1 portfolio from holding an asset with negative past returns. To test full dual momentum versions of SACEMS equally weighted (EW) Top 2 and EW Top 3 SACEMS portfolios, we add two more copies of Cash to the universe, thereby preventing both of them from holding assets with negative past returns. We focus on the effects of adding two copies of Cash on the holdings, compound annual growth rates (CAGR) and maximum drawdowns (MaxDD) of SACEMS EW Top 2 and EW Top 3 portfolios. Using monthly dividend adjusted closing prices for the asset class proxies and the yield for Cash during February 2006 through September 2022, we find that:

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Do exchange-traded funds (ETF) that track major currencies support a relative momentum strategy? To investigate, we consider the following four ETFs:

Invesco DB US Dollar Bullish (UUP)
Invesco CurrencyShares Euro Currency (FXE)
Invesco CurrencyShares Japanese Yen (FXY)
WisdomTree Chinese Yuan Strategy (CYB)

We each month rank these ETFs based on past return over lookback intervals ranging from one to 12 months. We consider portfolios of past winners reformed monthly based on Top 1 and on equal-weighted (EW) Top 2 and Top 3 ETFs. The benchmark portfolio is the equally weighted combination of all four ETFs. We present findings in formats similar to those used for the Simple Asset Class ETF Momentum Strategy and the Simple Asset Class ETF Value Strategy. Using monthly adjusted closing prices for the currency ETFs during March 2007 (when three become available) through August 2022, we find that: Keep Reading

Are equity multifactor strategies, as implemented by exchange-traded funds (ETF), attractive? To investigate, we consider seven ETFs, all currently available:

• iShares Edge MSCI Multifactor USA (LRGF) – holds large and mid-cap U.S. stocks with focus on quality, value, size and momentum, while maintaining a level of risk similar to that of the market. The benchmark is iShares Russell 1000 (IWB).
• iShares Edge MSCI Multifactor International (INTF) – holds global developed market ex U.S. large and mid-cap stocks based on quality, value, size and momentum, while maintaining a level of risk similar to that of the market. The benchmark is iShares MSCI ACWI ex US (ACWX).
• Goldman Sachs ActiveBeta U.S. Large Cap Equity (GSLC) – holds large U.S. stocks based on good value, strong momentum, high quality and low volatility. The benchmark is SPDR S&P 500 (SPY).
• John Hancock Multifactor Large Cap (JHML) – holds large U.S. stocks based on smaller capitalization, lower relative price and higher profitability, which academic research links to higher expected returns. The benchmark is SPY.
• John Hancock Multifactor Mid Cap (JHMM) – holds mid-cap U.S. stocks based on smaller capitalization, lower relative price and higher profitability, which academic research links to higher expected returns. The benchmark is SPDR S&P MidCap 400 (MDY).
• JPMorgan Diversified Return U.S. Equity (JPUS) – holds U.S. stocks based on value, quality and momentum via a risk-weighting process that lowers exposure to historically volatile sectors and stocks. The benchmark is SPY.
• Xtrackers Russell 1000 Comprehensive Factor (DEUS) – seeks to track, before fees and expenses, the Russell 1000 Comprehensive Factor Index, which seeks exposure to quality, value, momentum, low volatility and size factors. The benchmark is IWB.

We focus on monthly return statistics, along with compound annual growth rates (CAGR) and maximum drawdowns (MaxDD). Using monthly returns for the seven equity multifactor ETFs and benchmarks as available through August 2022, we find that: Keep Reading

Do morning and afternoon stock returns convey different meanings due to gradual dissipation of information asymmetry among traders during the trading day (as the market digests overnight news)? In their August 2022 paper entitled “A Tale of One Day: Morning Momentum, Afternoon Reversal”, Haoyu Xu and Xiaoneng Zhu investigate differences in implications for reversal and momentum strategies among morning (9:30AM – 11:30AM), midday (11:30AM – 2:00PM) and afternoon  (2:00PM – 4:00PM). Specifically, they:

• For each stock each month, cumulate returns over these three intervals.
• Sort stocks into tenths, or deciles, based either on cumulative returns over the most recent month (for reversal testing) or compounded cumulative returns from 12 months ago to one month ago (for momentum testing) for different combinations of these three intervals.
• Reform various long-short portfolios using extreme deciles to explore the different predictive powers of past morning and afternoon returns.

For reversal tests, they apply equal weighting. For momentum tests, they consider both value and equal weightings. They calculate raw returns, 3-factor (market, size, book-to-market) alphas and 4-factor (adding momentum) alphas as essential performance statistics. They use conventional strategies using full daily returns as benchmarks. Using intraday and daily return data for a broad sample of U.S. common stocks priced at least $5 during 1993 through 2018, they find that:

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A subscriber, referring to a March 2016 commentary stating that “microcap stocks offer investors one of the best opportunities for consistent, long-term excess returns,” inquired about the performance of quality-value-momentum microcap strategy described therein. To assessment this strategy, we compare the self-reported annual performance of the O’Shaughnessy Micro Cap strategy (OSMC) as of June 2022 (now maintained by Franklin Templeton) to that of simply buying and holding SPDR S&P 500 ETF Trust (SPY). Using annual self-reported OSMC net returns and matched dividend-adjusted SPY returns during August 2007 through June 2022, we find that: Keep Reading

Are the “Simple Asset Class ETF Value Strategy” (SACEVS) and the “Simple Asset Class ETF Momentum Strategy” (SACEMS) mutually diversifying. To check, based on feedback from subscribers about combinations of interest, we look at three equal-weighted (50-50) combinations of the two strategies, rebalanced monthly:

1. 50-50 Best Value – EW Top 2: SACEVS Best Value paired with SACEMS Equally Weighted (EW) Top 2 (aggressive value and somewhat aggressive momentum).
2. 50-50 Best Value – EW Top 3: SACEVS Best Value paired with SACEMS EW Top 3 (aggressive value and diversified momentum).
3. 50-50 Weighted – EW Top 3: SACEVS Weighted paired with SACEMS EW Top 3 (diversified value and diversified momentum).

We consider as a benchmark a simple technical strategy (SPY:SMA10) that holds SPDR S&P 500 ETF Trust (SPY) when the S&P 500 Index is above its 10-month simple moving average and 3-month U.S. Treasury bills (Cash, or T-bills) when below. We also test sensitivity of results to deviating from equal SACEVS-SACEMS weights. Using monthly gross returns for SACEVS, SACEMS, SPY and T-bills during July 2006 through July 2022, we find that: Keep Reading