Category: Investing Insight

Investing insight to make you a better investor.

Dual Momentum: NIFTY vs MIDCAP

In Global Equities Momentum, we looked at how toggling between US Equity Momentum and World ex-US Equity Momentum ETFs gave superior returns to buy-and-hold. Can the same framework be applied to toggle between NIFTY 50, MIDCAP 100 and bonds?

Relative Performance

For dual momentum to work, you need the excess returns of the two equity assets to be un-correlated (or very loosely correlated.) Here is the plot of rolling 200-day cumulative returns of the equity indices minus that of the 0-5 year bond total return index:

excess returns of NIFTY and MIDCAP
The line marked RELATIVE is the difference between MIDCAP 100 returns and NIFTY 50 returns.

What we see here is that there is a high degree of correlation between the two when it comes to excess returns over bonds. At the same time, however, the relative performance between the two equity indices tends to be sticky. So, a dual momentum model tuned to sniff out the “regime” should be able to give returns better than buy-and-hold.

For reference, here is how buy-and-hold performed:
buy-and-hold NIFTY/MIDCAP/bonds


Over different look-back periods, here is how the dual-momentum strategy worked:
NIFTY/MIDCAP dual momentum over different look-back periods

Over 3- and 4- month look-backs, the model does seem to show higher returns and lower drawdowns than buy-and-hold. But this is probably going to over-fit past data. But what happens if we specify the model to use “any” of the lookbacks? i.e., stay in equities if any of the look-backs signals the NIFTY 50 has out-performed bonds over the same period?

NIFTY 50/MIDCAP 100 dual momentum over any lookback

Here are its worst drawdowns:
drawdowns of NIFTY 50/MIDCAP 100 dual momentum over any lookback

A model setup this way has lower drawdowns and returns that better than NIFTY 50 but lower than that of MIDCAP 100 buy-and-hold. It really just boils down to how much pain you can bear – for those with a lot of testicular fortitude, buy-and-hold MIDCAPs are the best. But for the rest of us mere mortals, this strategy makes sense. And unlike an SMA model that checks for potential trades every day, this one checks only once a month. This keeps transaction costs low for long-term investors.

Code and more charts are on github.

Chart: One and Two Percent Moves

  1. Prev. Close-to-Open: c2o – overnight events
  2. Close-to-Close: c2c – fundamental
  3. Open-to-Close: o2c – sentiment
  4. High-to-Low: h2l – uncertainty


One percent:

Two percent:


One percent:

Two percent:

A lot of traders close out their positions by the end of the day. It certainly reduces the risk embedded in overnight moves (c2o) but that has been falling over the years. So has the o2c range. Perhaps it is an artifact of the bull market and reversion to the 2011-2013 range is imminent. Something to keep an eye on.

Code and charts on github.

Related: Is the Low Volatility Regime Breaking?

EM Bonds out-performed EM Equities the last decade

A recent article in WSJ had this to say about emerging market bonds:

Research on hard-currency bonds since Britain and Prussia defeated France at the Battle of Waterloo in 1815 shows that on average the return from lending to governments issuing external debt in sterling or dollars delivered a return close to U.S. stocks, with lower volatility.

EM bonds giving better returns than US stocks seems counter-intuitive. There is an ETF that tracks the bond index that the article talks about: EMB – iShares JP Morgan USD Emerging Markets Bond ETF. The ETF was launched on December 2007 (not during the Battle of Waterloo,) so we cannot really put that claim to test. However, here are the last 10-years for EMB, EEM (iShares MSCI Emerging Markets ETF) and SPY (SPDR S&P 500 ETF Trust):
ETF.EMB-EEM-SPY.cumulative returns

EM bonds beat EM equities, but not US stocks (SPY). US mega-caps pretty much beat every other equity market. Here are the MSCI indices of USA, WORLD ex US and EM:
USA, WORLD ex-USA, EM cumulative returns

Can’t really single out EM for under-performance when everything trailed. Besides, if you look at performance since 1987, aggregate returns from EM have been on par with those of US with complementary periods:
USA, WORLD ex-USA, EM cumulative returns

So, should you ditch your EM equities portfolio and get into EM bonds and US stocks? Some analysts could look at a decade of EM equity under-performance, point to its valuation spread vs. US mega-caps, and conclude that EMs are a better place to be for the next decade. While others could point out that the US is the home to most of the world’s biggest tech monopolies so it deserves the out-performance. We will only know who is right once 2030 rolls in. Until then, diversify your portfolio and enjoy your life.

Code and annual return charts are on github.

Global Equities Momentum Trades and Portfolio

We described a simple dual momentum strategy last month that toggles between equity and bond ETFs. In order to make it easier for you to follow the strategy, we have setup a Slack channel that posts trades triggered by this strategy. You can also follow the performance of this strategy through two virtual portfolios: Global Equities Momentum I and Global Equities Momentum II.

The GEM strategy employs a monthly rebalance schedule. So, at the maximum, expect one SELL and one BUY trade a month.

To request an invite to our Slack channel, click here. WhatsApp us if you have any questions!

MSCI Country Index Correlations

All stocks are correlated to one-another. In times of crisis, these correlations explode higher. The same is true for country indices. For example, if you look at the rolling 5-year monthly return correlations between the MSCI INDIA index and other country indices, Jordan is the least correlated and Hong Kong is the most correlated.

Least Correlated:
least correlated with INDIA

Most Correlated:
mostcorrelated with INDIA

The annual return charts show the zig/zag nature of these markets:

So, does it make sense to construct a 50/50 portfolio between INDIA and JORDAN? In theory, the resulting portfolio should have lower draw-downs and lesser volatility than either taken alone.

In contrast, here is the 50/50 INDIA/HONG KONG portfolio:

A take-away from this is that diversification within the same asset class (in this case equities,) does not help with drawdowns. Nor does it necessarily lead to higher returns. It is way of protecting yourself from mistakes that are only apparent in hindsight. Just ask investors who were invested 100% in Jordan the last decade.

Code and charts on github.
Related: Stock and Bond Correlations and Volatility