Strategy Update (last close: August 31st, 2024)
The S&P 500 (SPX) continues to lead the way for the Dual Momentum Rotation Strategies with a 36% gain year-to-date. The Nasdaq 100 (NDX) Dual Momentum Rotation Strategy is going through a roller coaster year with four up months and four down months. It is up 10% year-to-date.
These performance differentials were especially pronounced in August. The SPX strategy was up a whopping 9.7%, but the NDX Strategy finish the month pretty much unchanged (-0.10%). Note that the Nasdaq 100 strategy was down sharply the first week of August and made a strong comeback to finish even.
Over the last 20 years, September is the weakest month for these strategies. The Nasdaq 100 shows an average net gain of 1.3% for all months (260), but an average gain of just .10% in September. The S&P 500 strategy shows an average net gain of 1.2% for all months, but a net loss of .30% in September.
The ETF Trend Momentum Profit Target Strategy is have a good year as its equity curve hit a new high at the end of August. This strategy was up 2.1% in August and is up 14% year-to-date.
Keep in mind that performance metrics include open positions these are subject to change (future price movements). Note that the performance metrics are based on backtests in Amibroker. Your results may differ.
This page has two sections.
- Methodology behind the Dual Momentum Rotation Strategy
- Performance metrics – updated monthly (click here)
Methodology - The Momentum Edge
Momentum has provided a persistent edge in the US equity markets for decades. Stocks that are currently in uptrends are more likely to extend their uptrends and stocks that are outperforming now are more likely to outperform in the future. This strategy capitalizes on momentum by using two types: absolute momentum and relative momentum. First, we filter to find stocks that are in strong uptrends (absolute momentum). Second, we rank performance to select stocks that are outperforming the other index constituents. When used with a market timing filter, this dual-momentum approach outperforms buy-and-hold with significantly lower drawdowns. The signal table is covered at the end.
The usual disclaimers apply for the strategies and the analysis on TrendInvestorPro. Past performance does not guarantee future performance. You and you alone are responsible for your investment and trading decisions. Do your own due diligence.
Strategy Highlights
- Weekly Trading
- Market beating returns with lower drawdowns
- Trend Filter to ensure stock is in a strong uptrend
- Momentum rank to select the leaders
- Market filter to preserve capital during bear markets
S&P 500 Stocks sans Financials
This strategy trades S&P 500 stocks and excludes the finance sector. The finance sector is one of the biggest sectors in the S&P 500, but it is by far the weakest of the 11 sectors over the last twenty years. The PerfChart below shows performance for the 11 sector indexes since May 2003 (20+ years). Notice that the S&P 500 Financials Index ($SPF) shows the smallest gain (+142.68%) (short blue bar on the far right). Info Tech ($SPT) shows the largest gain (+1662.32%) (tall red bar on far left)
Strategy Mechanics
This is a long only strategy that trades only in bull markets. We use a 14 indicator breadth model to define bull and bear markets. The strategy moves to cash during bear markets. This market filter limits drawdowns and preserves capital during bear markets.
For the trend indicators, we are using the Exponential Slopes for two periods. These indicators quantify trend strength and filter for stocks in strong uptrends (absolute momentum). They also filter out stocks that are in downtrends.
The momentum indicator measures the volatility-adjusted price change. Its purpose is to rank stocks and select the strongest stocks in the index (relative momentum). We use the prior month’s value to mitigate the propensity to buy overbought stocks.
Volatility filters exclude stocks with excessively high volatility (extreme risk) and unusually low volatility (takeover candidates).
Liquidity filters exclude low-price stocks, stocks with low volume and stocks with low Dollar-Volume (price multiplied by volume).
This strategy buys the top ten stocks and sells a position when the stock drops out of the top twenty. This is the “rotation” aspect. The replacement is the stock with the highest ranking and a stock that is not already in the portfolio.
The rotation feature triggers sell signals in stocks that experience a decrease in relative momentum. These stocks are often still in uptrends, but relative momentum is waning. Exit signals, therefore, are not always based on a trend change or significant decline. This rotational aspect helps curtail losses because stocks are not always sold after a big drawdown. The strategy then rotates into stocks showing an increase in relative momentum.
There are two other exit signals. First, an exit signal triggers for an individual position when the trend indicator signals a downtrend. Second, all positions are closed when a bear market signals.
The rotation feature triggers sell signals in stocks that experience a decrease in relative momentum. These stocks are often still in uptrends, but relative momentum is waning. Exit signals, therefore, are not always based on a trend change or significant decline. This rotational aspect helps curtail losses because stocks are not always sold after a big drawdown. The strategy then rotates into stocks showing an increase in relative momentum.
Testing Criteria
– Performance metrics are based on backtesting with historical constituents.
– Buy and sell signals are based on closing prices at the end of the week.
– Entries and exits are based on opening prices at the beginning of the week.
– Each buy/sell includes a .10% charge to account for slippage and commission.
– Each entry position is sized to be 10% of the portfolio
– The strategy holds a maximum of ten positions.
– Returns do NOT include dividends or interest earned from cash.
Performance Metrics SPX (last close August 31 2024)
The table below shows performance metrics for the S&P 500 Dual Momentum Rotation Strategy and $SPX buy-and-hold. The strategy outperformed buy-and-hold with a significantly higher Compound Annual Return (CAR): +14.86% vs +8.93% (green shading). Just as important, the strategy’s Maximum Drawdown (-18.86%) is around a third that of buy-and-hold (-56.59%) and the Average Drawdown is in the -17.50% range (blue shading)
The chart below shows the equity curves for the strategy (green line) and for S&P 500 buy-and-hold (black line). The equity curve for the strategy surged in 2024 and finished August at a new high. Overall, the strategy outperforms by tripling ending equity for $SPX buy-and-hold ($621,365 vs $2,014,000). Also note that $SPX buy-and-hold experienced large drawdowns in 2008 (-56%) and 2020 (-34%). Notice how $SPX buy-and-hold (black line) turned negative as it dipped below $100,000 in 2008. The strategy mitigated these drawdowns and preserved capital by using a market filter. Notice how the strategy’s equity line was flat in 2008.
The next image shows the annual returns for the strategy. 2024 is so far the third best year since 2003 and the fourth year with 30+ percent gains. Overall, there were 3 losing years, 18 winning years and one flat year (2008). The strategy was in cash throughout 2008 because the market filter was bearish. Note that these returns do not include dividends or interested earned on cash. The average return over the entire period is +14.5% per year (blue line) and the Annual Sharpe Ratio is 1.0.
The next image shows the drawdowns over the entire period (blue line). Drawdown is the percentage decline from an equity high. Even though the equity curve and annual returns look good, there will be drawdowns and doubts along the way. 2022 was the last double-digit drawdown, which means we have not seen a double-digit drawdown in 20 months. The biggest drawdowns occurred in 2005 and 2010-2011 as they reached the -18% area. The horizontal lines show the median and average drawdowns.
The next image shows the monthly return breakdown for the strategy. Hashmarks (-) show when the strategy was in cash because the market filter was bearish. The strategy is up 36.1% year-to-date (as of August 31st). Most of these gains occurred in the first quarter and in August, which was up 9.7%. The S&P 500 strategy held up much better than the Nasdaq 100 strategy in August because it was more diversified and had exposure outside of tech.
Trading a strategy is a long-term endeavor, not a brief undertaking. There will be ups, downs, periods of outperformance and periods of underperformance. We cannot judge performance using days, weeks or even a few months. Long-term endeavors require a minimum of six months before passing judgement. Past performance does not guarantee future performance, but this dual-momentum strategy should keep its edge as long as the momentum edge persists in the US equity market.
The usual disclaimers apply for the strategies and the analysis on TrendInvestorPro. Past performance does not guarantee future performance. You and you alone are responsible for your investment and trading decisions. Do your own due diligence.
Signal and Rank Examples
This section shows examples for our signal tables, which are posted every weekend. The tables for the S&P 500 and Nasdaq 100 signals work the same way. This example covers the S&P 500 signals, but the process for using the Nasdaq 100 signal table is the same.
We start with a summary table showing current positions and new entry/exit signals. The top 20 stocks for the current week and prior week are on the right (blue/yellow shading). These side-by-side tables make it easy to see when a stock falls out of the top 20.
The table shows current positions (Open Long), new ENTRIES (green) and new EXITS (red). These signals are based on the close on the last trading day of the week. This date appears at the top left of the table. The actual ENTRY and EXIT are for the first trading day of the following week.
The current ENTRY/EXIT signals also appear below this table. In the example above, there is an ENTRY signal for LLY and an EXIT signal for RSG. Not all weeks have ENTRY and EXIT signals. Sometimes the portfolio stays the same. EXIT signals trigger for three reasons: the stock falls out of the top 20, an indicator turns bearish or the CBM turns bearish.
The next table shows the last 20 closed positions. This table includes the entry date, the exit date, the percentage gain/loss and bars held. Bars represent trading days (no weekends or holidays). 20 bars is the equivalent of four weeks.
The usual disclaimers apply for the strategies and the analysis on TrendInvestorPro. Past performance does not guarantee future performance. You and you alone are responsible for your investment and trading decisions. Do your own due diligence.
