Assessing Jay’s Pure Momentum Sector Fund System
December 4, 2015 - Momentum Investing
A subscriber requested evaluation of Jay’s Pure Momentum Sector Fund System, specified by originator Jay Kaeppel as follows:
- At the end of the first month, assign 20% weight to the five of the 40 Fidelity Select Sector funds (excluding Select Gold, FSAGX) with the largest positive returns over the previous 240 trading days.
- At the end of each subsequent month, sell any positions that drop out of the top five and reallocate proceeds equally to their replacements.
- If for any month fewer than five funds have positive returns, leave unpopulated positions in cash.
This system involves both relative momentum (picking past winners) and absolute or intrinsic momentum (requiring positive past returns). The author states that the publication year for the system is 2001, so we start with 2002 for a test free of data snooping. We accept annual returns for 2002 through (partial) 2015 as reported by the author . We consider two simple benchmarks: (1) buy and hold SPDR S&P 500 (SPY); and, (2) hold SPY when it is above its 10-month simple moving average and 3-month U.S. Treasury bills (T-bills, a proxy for cash) otherwise (SPY-SMA10). The second benchmark is a simple, widely used market timing rule that helps decide whether Jay’s Pure Momentum Sector Fund System outperforms the market because of sector rotation (relative momentum) or market timing (absolute momentum). Using annual returns for Jay’s Pure Momentum System, monthly dividend-adjusted prices and annual returns for SPY and monthly T-bill yields during 2002 through mid-September 2015 (nearly 14 years), we find that: Keep Reading