Gary Antonacci created the Global Equities Momentum (GEM) model that applied dual momentum to stock and bond indices. It toggles between stocks and bonds using 12-month trailing returns. And when it toggles to “stocks,” it chooses between US equities and International (ex-US) equities based on whichever posted higher returns in the previous 12-months. Newfound Research has a chart that puts it across succinctly:
The model uses the S&P 500 index as a stand-in for US equities and the WORLD ex USA index for international stocks. However, there is nothing in the construction that prevents us from replacing those market-cap based indices with momentum based ones.
US Momentum / Market-cap International
Scenario 1: keep everything the same, except in the last stage, instead of buying S&P 500, buy US Momentum (SP 500×1).
Scenario 2: swap out S&P 500 and put US Momentum everywhere in the decision tree (MOM).
US Momentum / International Momentum
What if, we bought International Momentum (WORLD ex USA MOMENTUM) instead of the market-cap based WORLD ex USA?
Scenario 3 (dark blue): keep everything the same, except in the last stage, instead of buying S&P 500, buy US Momentum. And instead of buying market-cap international, buy WORLD ex USA MOMENTUM (SP 500×2).
Scenario 4 (light blue): swap out S&P 500 and put US Momentum everywhere. And instead of buying market-cap international, buy WORLD ex USA MOMENTUM (MOMx2).
It appears that using the S&P 500 index for making decisions about buying US vs. World ex-US momentum boosts returns while keeping a floor under drawdowns.
Code and charts are on github.