In Part I of this series, we saw that it is very rare for two consecutive down months to be followed by a third one. Here, we present a simple backtest that goes long NIFTY 50 for a month if the previous two months were negative.
The shallow drawdowns of this strategy makes it ideal for leveraged trades. NIFTY futures are about 7x levered. That should transform the 190% gross return to about 1330%, beating buy and hold by a wide margin. The MIDCAP 100 index behaves similar to this between the 2005 through 2018 time-frame. However, the results are not so great if you include data prior to 2005.
This looks like a case of severe data-mining and should be discounted as such. But it is an interesting result nevertheless.
Code and charts are on github.
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