Stock-Strategy: Dual Momentum Rotation Strategy for Nasdaq 100 Stocks – Full Details and Performance Metrics

Our Dual Momentum Rotation Strategies are performing well in the first five months of the year. After big gains in January-February, the market softened in March-April, especially Nasdaq 100 stocks. The Nasdaq 100 strategy went into drawdown, while the S&P 500 treaded water. Both rebounded along with the market in May. Nvidia (NVDA) propelled the Nasdaq 100 strategy higher, while Leidos Holdings (LDOS) powered the S&P 500 strategy. Overall, our market timing model remains bullish and the strategies remain fully invested. Note that the performance metrics are based on backtests in Amibroker. Your results may differ.

This page has two sections. The first section covers the methodology behind the Dual Momentum Rotation Strategies. The second section covers performance metrics, which are updated at the beginning of every month. Click here to jump to the performance metrics.

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

Nasdaq 100 Stocks

The strategy trades Nasdaq 100 stocks to capitalize on growth and Beta. The Nasdaq 100 is by far the best performing index over the last 10 years.

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 (last close May 31, 2024)

The table below shows performance metrics for the Nasdaq 100 Dual Momentum Rotation Strategy and $NDX buy-and-hold. The strategy outperformed buy-and-hold by .66 percent per year (+15.28% vs +14.62%) (green shading). More importantly, the strategy’s Maximum Drawdown (-25.79%) was less than half that of buy-and-hold (-53.70%) and the Average Drawdown was is in the -20% range (blue shading). Thus, the strategy beat buy-and-hold with much lower drawdowns.

The chart below shows the equity curves for the strategy (green line) and for Nasdaq 100 buy-and-hold (black line). The strategy largely outperforms $NDX buy-and-hold because the green line is almost always above the black line. Note, however, that $NDX buy-and-hold experienced large drawdowns in 2008 (-53%) and 2022 (-35%). Notice how the strategy’s equity curve (green line) was flat even as the buy-and-hold equity curve (black line) fell sharply. The strategy mitigated these market drawdowns and preserved capital by using a market filter.

The next image shows the annual returns for the strategy. 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 interest earned on cash. The average return over the entire period is +15.3% per year (blue line) and the Annual Sharpe Ratio is .90.

Even though the equity curve and annual returns look good, there will be drawdowns and doubts along the way. The next image shows the drawdowns over the entire period (blue line). Drawdown is the percentage decline from an equity high. The biggest drawdowns occurred in 2005 and reached the -25% area. From 2007 onwards, the biggest drawdowns ranged from -14% to -20% percent. The horizontal lines show the median and average drawdown.

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 last line shows monthly performance for 2024. The strategy gained 6.1% and 11.9% in January and February, respectively. It then lost 1.6% and 5.7% in March and April, respectively. These two losing months produced a drawdown of around 8%, which is similar to a pullback within an uptrend. This was an opportunity as the strategy rebounded in May with a 4.1% gain. Overall, the strategy is up 14.9% year-to-date.

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.

Thanks for tuning in and have a great day!

-Arthur Hill, CMT
Choose a Strategy, Develop a Plan and Follow a Process

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