Tag: momentum

Using Momentum to Short Butterflies

Turning Momentum’s primary weakness into strength

The biggest problem with any trend-following strategy is sudden reversals in trend. This fits nicely into the biggest problem with selling butterflies – that the underlying stays where it is. One thing that momentum stocks guarantee is that they will move big.

Our earlier attempts at developing a mechanical short-call butterfly strategy for the NIFTY failed because there would be months when the NIFTY would just end flat for expire very close to where it started after bouncing all over the place. Let’s see if using single-stock options overcomes this problem.

A quick back-test

In order to hedge our bets, we consider only the top 3 and the bottom 3 stocks in our momentum universe. And then we apply a liquidity filter to ensure that we can actually carry out the trades. Trades are entered 10 days after expiry and held till expiry. No stop-loss is applied.

Top
top mom butterfly
Bottom
bottom mom butterfly
Combined
total mom butterfly

Conclusion

Using momentum to drive a short-call butterfly strategy holds promise. We have created a Theme for it – Shattered – to help traders access this strategy.

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Index Update 11.07.2015

MOMENTUM

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:

index momentum best 365 2015-07-10 png

index momentum best 50 2015-07-10 png

index momentum worst 365 2015-07-10 png

index momentum worst 50 2015-07-10 png

Relative Strength Spread

CNX_500 relative-spread-index 50 2015-07-10 png

Refactored Index Performance

50-day performance, from May 04, 2015 through July 10, 2015:

Equally Weighted Market Cap. Weighted
CNX PHARMA (EQUAL) +19.53% CNX PHARMA (CAP) +8.18%
CNX FMCG (EQUAL) +5.71% CNX MEDIA (CAP) +4.86%
CNX CONSUMPTION (EQUAL) +4.31% CNX INFRA (CAP) +3.67%
CNX MEDIA (EQUAL) +2.51% CNX CONSUMPTION (CAP) +2.44%
CPSE INDEX (EQUAL) +2.38% CNX FINANCE (CAP) +2.43%
CNX MNC (EQUAL) +1.85% CNX ENERGY (CAP) +1.34%
CNX AUTO (EQUAL) +1.67% CNX MNC (CAP) +1.33%
NSE QUALITY 30 (EQUAL) +1.49% CNX BANK (CAP) +1.05%
NI15 (EQUAL) +1.42% CNX SERVICE (CAP) -0.13%
CNX FINANCE (EQUAL) +1.07% CNX FMCG (CAP) -0.17%
CNX PSE (EQUAL) -0.94% NV20 (CAP) -0.58%
CNX IT (EQUAL) -1.44% NI15 (CAP) -0.77%
NV20 (EQUAL) -1.46% CNX COMMODITIES (CAP) -0.82%
CNX SERVICE (EQUAL) -2.45% CPSE INDEX (CAP) -1.10%
CNX BANK (EQUAL) -3.36% CNX PSE (CAP) -1.17%
CNX INFRA (EQUAL) -3.80% CNX AUTO (CAP) -1.40%
CNX ENERGY (EQUAL) -4.42% NSE QUALITY 30 (CAP) -1.48%
CNX COMMODITIES (EQUAL) -4.94% CNX IT (CAP) -3.93%
LIX 15 (EQUAL) -9.36% CNX PSU BANK (CAP) -5.67%
CNX PSU BANK (EQUAL) -10.36% LIX 15 (CAP) -8.07%
CNX REALTY (EQUAL) -12.10% CNX METAL (CAP) -12.71%
CNX METAL (EQUAL) -12.32% LIX15 Midcap (CAP) -14.15%
LIX15 Midcap (EQUAL) -14.25% CNX REALTY (CAP) -14.91%

Trend Model Summary

Index Signal % From Peak Day of Peak
CNX AUTO SHORT
9.51
2015-Jan-27
CNX BANK LONG
8.93
2015-Jan-27
CNX COMMODITIES SHORT
28.96
2008-Jan-04
CNX CONSUMPTION LONG
2.44
2015-Apr-13
CNX ENERGY SHORT
27.21
2008-Jan-14
CNX FMCG SHORT
10.80
2015-Feb-25
CNX INFRA LONG
46.72
2008-Jan-09
CNX IT SHORT
88.69
2000-Feb-21
CNX MEDIA LONG
24.79
2008-Jan-04
CNX METAL LONG
60.32
2008-Jan-04
CNX MNC LONG
3.13
2015-Mar-12
CNX NIFTY LONG
7.07
2015-Mar-03
CNX PHARMA LONG
9.35
2015-Apr-08
CNX PSE LONG
25.36
2008-Jan-04
CNX PSU BANK LONG
37.25
2010-Nov-05
CNX REALTY SHORT
90.44
2008-Jan-14
CNX SERVICE LONG
8.97
2015-Mar-03
Finance and FMCG showed an uptick in momentum. However, the word of the week is “listless.” Expect most trend followers to lose discipline right about now…
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Index Update 04.07.2015

MOMENTUM

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:

index momentum best 365 2015-07-03 png

index momentum best 50 2015-07-03 png

index momentum worst 365 2015-07-03 png

index momentum worst 50 2015-07-03 png

Relative Strength Spread

CNX_500 relative-spread-index 50 2015-07-03 png

Refactored Index Performance

50-day performance, from April 24, 2015 through July 03, 2015:

Equally Weighted Market Cap. Weighted
CNX PHARMA (EQUAL) +19.20% CNX MEDIA (CAP) +7.71%
CPSE INDEX (EQUAL) +6.19% CNX PHARMA (CAP) +6.92%
CNX MNC (EQUAL) +5.81% CNX MNC (CAP) +5.44%
CNX FMCG (EQUAL) +5.57% CNX ENERGY (CAP) +5.33%
CNX AUTO (EQUAL) +5.23% NV20 (CAP) +4.09%
CNX CONSUMPTION (EQUAL) +4.55% CNX BANK (CAP) +4.05%
CNX MEDIA (EQUAL) +4.15% CNX FINANCE (CAP) +3.68%
NI15 (EQUAL) +3.46% CNX AUTO (CAP) +3.67%
NSE QUALITY 30 (EQUAL) +2.50% CPSE INDEX (CAP) +3.25%
NV20 (EQUAL) +2.30% CNX INFRA (CAP) +3.02%
CNX PSE (EQUAL) +1.96% CNX CONSUMPTION (CAP) +2.94%
CNX IT (EQUAL) +0.82% CNX SERVICE (CAP) +2.56%
CNX FINANCE (EQUAL) +0.46% CNX COMMODITIES (CAP) +2.53%
CNX BANK (EQUAL) -0.17% CNX PSE (CAP) +2.37%
CNX ENERGY (EQUAL) -0.21% NI15 (CAP) +0.83%
CNX SERVICE (EQUAL) -0.68% CNX IT (CAP) +0.76%
CNX COMMODITIES (EQUAL) -1.85% NSE QUALITY 30 (CAP) -0.00%
CNX INFRA (EQUAL) -2.58% CNX FMCG (CAP) -2.19%
LIX 15 (EQUAL) -5.83% LIX 15 (CAP) -3.56%
CNX REALTY (EQUAL) -9.77% CNX PSU BANK (CAP) -5.78%
CNX PSU BANK (EQUAL) -10.29% CNX METAL (CAP) -9.42%
CNX METAL (EQUAL) -12.25% CNX REALTY (CAP) -11.90%
LIX15 Midcap (EQUAL) -13.61% LIX15 Midcap (CAP) -13.11%

Trend Model Summary

Index Signal % From Peak Day of Peak
CNX AUTO SHORT
6.66
2015-Jan-27
CNX BANK SHORT
8.88
2015-Jan-27
CNX ENERGY SHORT
25.33
2008-Jan-14
CNX FMCG LONG
9.20
2015-Feb-25
CNX INFRA LONG
46.95
2008-Jan-09
CNX IT LONG
88.27
2000-Feb-21
CNX MEDIA LONG
23.15
2008-Jan-04
CNX METAL LONG
58.71
2008-Jan-04
CNX MNC LONG
1.66
2015-Mar-12
CNX NIFTY SHORT
5.68
2015-Mar-03
CNX PHARMA LONG
11.32
2015-Apr-08
CNX PSE LONG
23.84
2008-Jan-04
CNX REALTY SHORT
90.35
2008-Jan-14
50-day performance turns green for most indices and the MNCs have more or less covered their draw-downs. Looks like financials and FMCG have found their mojo. Will the markets keep their trend?
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Index Update 27.06.2015

MOMENTUM

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:

index momentum best 365 2015-06-26 png

index momentum best 50 2015-06-26 png

index momentum worst 365 2015-06-26 png

index momentum worst 50 2015-06-26 png

Relative Strength Spread

CNX_500 relative-spread-index 50 2015-06-26 png

Refactored Index Performance

50-day performance, from April 17, 2015 through June 26, 2015:

Equally Weighted Market Cap. Weighted
CNX PHARMA (EQUAL) +13.06% CNX MNC (CAP) +2.67%
CNX MNC (EQUAL) +6.58% CNX MEDIA (CAP) +1.11%
CPSE INDEX (EQUAL) +0.66% CNX BANK (CAP) +0.14%
CNX MEDIA (EQUAL) -0.63% CNX PHARMA (CAP) +0.13%
CNX CONSUMPTION (EQUAL) -1.62% CNX ENERGY (CAP) +0.08%
CNX FMCG (EQUAL) -2.02% NV20 (CAP) -0.47%
NV20 (EQUAL) -2.08% CNX FINANCE (CAP) -0.49%
CNX AUTO (EQUAL) -2.14% CPSE INDEX (CAP) -0.94%
CNX PSE (EQUAL) -2.89% CNX AUTO (CAP) -1.64%
NSE QUALITY 30 (EQUAL) -2.92% CNX COMMODITIES (CAP) -1.76%
NI15 (EQUAL) -3.08% CNX SERVICE (CAP) -2.14%
CNX FINANCE (EQUAL) -3.19% CNX CONSUMPTION (CAP) -2.22%
CNX IT (EQUAL) -3.98% CNX PSE (CAP) -2.24%
CNX ENERGY (EQUAL) -4.86% CNX INFRA (CAP) -2.65%
CNX COMMODITIES (EQUAL) -5.50% CNX IT (CAP) -3.71%
CNX BANK (EQUAL) -5.56% NI15 (CAP) -4.59%
CNX SERVICE (EQUAL) -5.74% NSE QUALITY 30 (CAP) -4.97%
CNX INFRA (EQUAL) -7.64% CNX FMCG (CAP) -7.42%
LIX 15 (EQUAL) -9.59% LIX 15 (CAP) -7.72%
CNX METAL (EQUAL) -14.72% CNX METAL (CAP) -10.14%
CNX REALTY (EQUAL) -15.30% CNX PSU BANK (CAP) -12.60%
CNX PSU BANK (EQUAL) -17.19% LIX15 Midcap (CAP) -16.52%
LIX15 Midcap (EQUAL) -17.66% CNX REALTY (CAP) -17.55%

Trend Model Summary

Index Signal % From Peak Day of Peak
CNX AUTO LONG
7.17
2015-Jan-27
CNX BANK LONG
10.62
2015-Jan-27
CNX ENERGY LONG
25.82
2008-Jan-14
CNX FMCG LONG
11.66
2015-Feb-25
CNX INFRA LONG
47.92
2008-Jan-09
CNX IT LONG
88.10
2000-Feb-21
CNX MEDIA LONG
24.66
2008-Jan-04
CNX METAL LONG
58.47
2008-Jan-04
CNX MNC LONG
3.71
2015-Mar-12
CNX NIFTY LONG
6.84
2015-Mar-03
CNX PHARMA LONG
12.76
2015-Apr-08
CNX PSE LONG
24.69
2008-Jan-04
CNX REALTY SHORT
90.21
2008-Jan-14
A perk up in momentum metrics: RS-Spread has reverted to mean; bank and financials are showing some green shoots.
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Momentum should be part of every portfolio

The Two Anomalies in Finance

Momentum and Value remain the two “anomalies” in finance. The Efficient Market Hypothesis cannot explain why value investing, where investors pick up “under-priced” stocks, and momentum investing, where investors bet on stocks that have already run up, give out-sized returns compared to the rest of the market. After all, aren’t markets supposed to discover the “right” price and negate these effects?

Investing in Momentum

Value investors get a lot of face-time in media – people like to hear about stocks that are “hidden gems” that can suddenly come alive and give out-sized returns. However, very little is spoken about momentum investing. This results in investment portfolios that are underweight momentum.

The problem with momentum investing are the large draw-downs. When momentum stocks tank, they do so spectacularly. The draw-down keeps away most mutual funds from seriously pursuing this strategy: a) they can’t get out easily, and b) if they show too much volatility, investors will revolt.

But individual investors don’t have these constraints if they learn to embrace volatility.

Comparing Momentum Returns

Our FundCompare tool allows you to see how momentum investing has fared over different time-frames and compare their returns to whatever mutual fund you own. For example, if you compare Momentum with the ICICI Value Discovery Fund, here’s how the monthly returns compare:

Between 2014-01-01 and 2015-06-18, Momentum has had an IRR of 70.16% vs. ICICI Prudential Value Discovery Fund’s IRR of 50.05%download

How much should you invest?

Risk, at the end of the day, is whatever allows you to sleep at night. You could start with a 10% allocation and scale till you reach your limit. Whichever way you choose to go bout it, our Momentum Theme will be ready for you.

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