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Intrinsic Momentum or SMA for Avoiding Crashes?

Posted in Momentum Investing, Technical Trading

A subscriber suggested comparing intrinsic momentum (IM), also called absolute momentum and time series momentum, to simple moving average (SMA) as alternative signals for equity market entry and exit. To investigate across a wide variety of economic and market conditions, we measure the long run performances of entry and exit signals from IM over past intervals of one to 12 months (IM1 through IM12) and SMAs ranging from 2 to 12 months (SMA2 through SMA12. We consider two cases for IM signals: (1) in stocks (cash) when past return is positive (negative); and, (2) in stocks (cash) when average monthly past return is above (below) the average monthly risk-free rate, proxied by the 3-month U.S. Treasury bill (T-bill) yield, over the same measurement interval. The rule for SMAs is: in stocks (cash) when current level is above (below) the SMA. Using monthly T-bill yield and monthly level of the Dow Jones Industrial Average (DJIA) during January 1934 through April 2018 (over 84 years), we find that:

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