Intrinsic Momentum Framed as Stop-loss/Re-entry Rules
June 24, 2013 - Momentum Investing, Technical Trading
Do asset classes generally exhibit enough price momentum to make stop-loss and re-entry rules effective for timing them? In his June 2013 paper entitled “Assessing Stop-loss and Re-entry Strategies”, Joachim Klement analyzes four stop-loss and re-entry rule pairs for six regional stock market indexes, a U.S. real estate investment trust (REIT) index, a commodity index and spot gold. Specifically, he tests:
- Fast out-fast in (most effective when there are multiple brief corrections): Exit (re-enter) when the cumulative loss (gain) over the past 3 (3) months exceeds some specified threshold.
- Fast out-slow in (most effective during a downward or sideways trend): Exit (re-enter) when the cumulative loss (gain) over the past 3 (12) months exceeds some specified threshold.
- Slow out-fast in (most effective during an upward trend with intermittent crashes): Exit (re-enter) when the cumulative loss (gain) over the past 12 (3) months exceeds some specified threshold.
- Slow out-slow in (most effective when momentum is weak and transaction costs are high): Exit (re-enter) when the cumulative loss (gain) over the past 12 (12) months exceeds some specified threshold.
He tests ranges of stop-loss and re-entry decision thresholds. Because asset class return volatilities differ, he scales these thresholds to the annual standard deviation of returns for each asset class. He assumes a constant exit/re-entry trading friction of 0.25% and zero return on cash. For relevant tests, he defines a secular bull (bear) market as an extended subperiod of positive returns significantly above long-term average (negative or zero real returns). Using monthly asset class index returns as available during January 1970 through April 2013 in local currencies when applicable, he finds that: Keep Reading