Invest Without Emotions
A lot of thick blue squares mean that positive correlations are high. Red squares mean negative correlations are high. Whites are the doldrums.
Momentum effects are one of the premier anomalies in the market and we have been running an equity long-only momentum strategy since 2013 with returns of +64.44% vs. Nifty’s +27.25% so far. Given the success of long-only equity momentum, we were curious as to how a long-short version of it would perform in India given our unique constraints. And also investigate if its success could be replicated using derivatives.
Typically, academic research that discuss momentum tide over the difficulty involved in shorting stocks. In India, you can only short stocks through SLBS in quantities that are multiples of the lot-size. And only those stocks that are allowed in the F&O segment can be borrowed for selling short. In order to overcome these constraints, we restricted our universe of stocks to only those that have been in the F&O segment since Jan 2004. There are grand total of 97 stocks that fit this criteria.
The biggest problem with choosing such a restricted universe is survivorship bias. One can argue that the stocks that survived from 2004 through 2015 and had enough liquidity to be listed in F&O would have stronger long-term momentum than those that do not. If this is true, then it doesn’t make sense going short. We will see if this hypothesis is confirmed in our back-test.
Typically, momentum strategies are run using a one-year look-back period. We wanted to check what kind of impact shorter look-back periods had on overall returns. The following results are for going long (equally weighted) the top 5 stocks in our universe at the beginning of every month and holding it for one month.
The red line is the one-year look-back momentum; black is 100-day look-back momentum; and green is buy & hold Nifty
By year:
You would think that shorting “weak” stocks should give returns comparable to going long “strong” stocks. But that doesn’t seem to be the case. The short-portfolio was always a drag on performance and made returns more volatile.
A long-only momentum strategy with a one-year look-back beat the pants out of both the Nifty and the long-short strategy. This could be because the pool of stocks in F&O show strong survivorship bias. We will continue to investigate if the short portfolio can be made more efficient. Stay tuned!
| MINTs | |
|---|---|
| JCI(IDN) | +1.88% |
| INMEX(MEX) | +1.62% |
| NGSEINDX(NGA) | -0.92% |
| XU030(TUR) | +0.33% |
| BRICS | |
|---|---|
| IBOV(BRA) | +1.64% |
| SHCOMP(CHN) | -5.31% |
| NIFTY(IND) | +0.12% |
| INDEXCF(RUS) | +1.20% |
| TOP40(ZAF) | -0.99% |
| Energy | |
|---|---|
| Heating Oil | -0.83% |
| Natural Gas | +5.22% |
| Brent Crude Oil | -1.76% |
| WTI Crude Oil | -0.18% |
| Ethanol | +1.91% |
| RBOB Gasoline | -2.24% |
| Metals | |
|---|---|
| Platinum | -0.08% |
| Copper | +1.04% |
| Palladium | +2.72% |
| Gold 100oz | +0.38% |
| Silver 5000oz | +1.86% |
| MINTs | |
|---|---|
| USDIDR(IDN) | +1.15% |
| USDMXN(MEX) | -1.55% |
| USDNGN(NGA) | +0.16% |
| USDTRY(TUR) | +0.78% |
| BRICS | |
|---|---|
| USDBRL(BRA) | -1.32% |
| USDCNY(CHN) | +0.10% |
| USDINR(IND) | +0.81% |
| USDRUB(RUS) | -1.29% |
| USDZAR(ZAF) | +0.10% |
| Agricultural | |
|---|---|
| White Sugar | +1.17% |
| Coffee (Robusta) | -2.17% |
| Corn | -0.83% |
| Feeder Cattle | -0.72% |
| Soybean Meal | -1.53% |
| Soybeans | +0.36% |
| Sugar #11 | +1.22% |
| Wheat | -0.21% |
| Cattle | -5.08% |
| Cotton | -2.85% |
| Lean Hogs | +5.52% |
| Lumber | -7.84% |
| Orange Juice | +1.21% |
| Cocoa | -0.45% |
| Coffee (Arabica) | -3.79% |
| Index | Change |
|---|---|
| Markit CDX EM | -0.03% |
| Markit CDX NA HY | -0.59% |
| Markit CDX NA IG | +2.67% |
| Markit iTraxx Asia ex-Japan IG | -0.22% |
| Markit iTraxx Australia | +0.48% |
| Markit iTraxx Europe | +1.76% |
| Markit iTraxx Europe Crossover | +10.94% |
| Markit iTraxx Japan | +2.28% |
| Markit iTraxx SovX Western Europe | -0.21% |
| Markit LCDX (Loan CDS) | +0.00% |
| Markit MCDX (Municipal CDS) | +0.35% |
For a deeper dive into indices, check out our weekly Index Update.
| Decile | Mkt. Cap. | Adv/Decl |
|---|---|---|
| 1 (micro) | -3.91% | 60/69 |
| 2 | -6.40% | 64/64 |
| 3 | -3.74% | 63/65 |
| 4 | -2.57% | 58/70 |
| 5 | -3.22% | 55/73 |
| 6 | -3.93% | 54/74 |
| 7 | -3.29% | 56/72 |
| 8 | -2.15% | 64/63 |
| 9 | -3.23% | 57/71 |
| 10 (mega) | -2.96% | 66/63 |
| HINDALCO | +8.05% |
| BAJAJ-AUTO | +8.95% |
| ABIRLANUVO | +19.35% |
| SRTRANSFIN | -18.54% |
| BANKBARODA | -14.14% |
| EXIDEIND | -10.61% |
| CPSEETF | +0.42% |
| NIFTYBEES | -0.14% |
| GOLDBEES | -0.81% |
| INFRABEES | -1.51% |
| JUNIORBEES | -2.32% |
| BANKBEES | -3.84% |
| PSUBNKBEES | -4.45% |
| Sub Index | Change in YTM | Total Return(%) |
|---|---|---|
| GSEC TB | -1.07 | +0.50% |
| GSEC SUB 1-3 | -0.77 | +1.81% |
| GSEC SUB 3-8 | -0.63 | +2.30% |
| GSEC SUB 8 | -0.28 | +2.63% |
| CNX 100 Enterprise Yield | +1.15% |
| Magic Formula | +0.61% |
| ASK Life | +0.22% |
| Tactical CNX 100 | +0.00% |
| Low Volatility | -0.10% |
| Next Trillion | -0.38% |
| Balance Sheet Strength | -0.57% |
| Textile, Metals, Chemicals, Paper and Energy Quality to Price | -0.66% |
| PPFAS Long Term Value | -1.02% |
| Quality to Price | -1.13% |
| Auto and Consumer Goods Quality to Price | -1.57% |
| Momentum | -1.70% |
| Media, Health, IT, Telecom, Services, Pharma Quality To Price | -1.94% |
| Financial Strength Value | -2.22% |
| ADAG stocks | -2.38% |
| The RBI Restricted List | -4.66% |
| High Beta | -5.04% |
Zappos, an online shoe retailer, announced that the company was eliminating managers and attempting to make Zappos “a fully self-organized, self-managed organization by combining a variety of different tools and processes.” The move to self organize involves the adoption of Holacracy, a system of governance that emphasizes the distribution of authority.
Subsequently, about 14% of the company’s workforce, or 210 out of 1,503 employees, quit.
Source: Zappos Watches 210 Employees Self-Manage Themselves Out The Door
We run our proprietary momentum scoring algorithm on indices just like we do on stocks. You can use the momentum scores of sub-indices to get a sense for which sectors have the wind on their backs and those that are facing headwinds.
Traders can pick their longs in sectors with high short-term momentum and their shorts in sectors with low momentum. Investors can use the longer lookback scores to position themselves using our re-factored index Themes.
You can see how the momentum algorithm has performed on individual stocks here.
Here are the best and the worst sub-indices:
50-day performance, from February 24, 2015 through May 08, 2015:
| Index | Signal | % From Peak | Day of Peak |
|---|---|---|---|
| CNX AUTO | SHORT |
9.89
|
2015-Jan-27
|
| CNX BANK | SHORT |
13.42
|
2015-Jan-27
|
| CNX ENERGY | SHORT |
30.10
|
2008-Jan-14
|
| CNX FMCG | SHORT |
10.93
|
2015-Feb-25
|
| CNX INFRA | SHORT |
50.20
|
2008-Jan-09
|
| CNX IT | SHORT |
88.30
|
2000-Feb-21
|
| CNX MEDIA | SHORT |
30.20
|
2008-Jan-04
|
| CNX METAL | SHORT |
55.67
|
2008-Jan-04
|
| CNX MNC | SHORT |
5.36
|
2015-Mar-12
|
| CNX NIFTY | SHORT |
8.95
|
2015-Mar-03
|
| CNX PHARMA | SHORT |
12.48
|
2015-Apr-08
|
| CNX PSE | SHORT |
27.69
|
2008-Jan-04
|
| CNX REALTY | SHORT |
88.96
|
2008-Jan-14
|
A lot of thick blue squares mean that positive correlations are high. Red squares mean negative correlations are high. Whites are the doldrums.