Tag: momentum

Practical Momentum, Part II – Volatility Adjustment

shyam May 16, 2015 0

Introduction

Previously, we ran back-tests on long-only and long-short momentum algorithm over a couple of look-back periods. We found that (a) momentum with a one-year look-back period out-performed one with a 100-day look-back, and (b) a long-only portfolio significantly out-performed a long-short portfolio. We hypothesize that this is probably because the universe of stocks that we are forced to consider was heavily plucked. But what if we added a volatility metric into the mix to smooth out draw-downs?

Long-only Momentum

First, lets take a look at the long-only portfolio; both with a one-year look-back:

The red line is the volatility adjusted momentum; black is naive momentum; and green is buy & hold Nifty
long-only-momentum.volatility.2005-2010

long-only-momentum.volatility.2011-2014.

By year:

Adding volatility into the mix did nothing to drawdowns but boosted returns considerably – with volatility adjusted momentum out-performing the naive version in 7 out of 10 years.

Long-short Momentum

Long-short ended up under-performing long-only once again:

The red line is long-short momentum; black is long-only momentum; and green is buy & hold Nifty
long-short-momentum.volatility.2005-2010

long-short-momentum.volatility.2011-2014

By year:

long-short-momentum2

Conclusion

Over the long run, long-only momentum with volatility adjustment outperformed the long-short version. However, while long-only tanked with the rest of the market in 2008, long-short was in the green. So if you are one of those guys who ask “how did this strategy perform in 2008?” Well, it performed pretty well. But would you have stuck by it when it got shellacked in 2013?

The problem with steep drawdowns is that it makes implementing the strategy with derivatives or leverage difficult. Margin calls might force you to abandon the strategy just before it turns. Next, we will explore a hedged long-only momentum strategy. Stay tuned!

Categories Investing Insight, Your Money Tags momentum, quant

Index Update 16.05.2015

stockviz May 16, 2015May 16, 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:

Refactored Index Performance

50-day performance, from March 02, 2015 through May 15, 2015:

Equally Weighted		Market Cap. Weighted
CNX FMCG (EQUAL)	+2.48%	CNX CONSUMPTION (CAP)	-1.65%
CNX MNC (EQUAL)	-1.05%	CNX AUTO (CAP)	-3.03%
CNX CONSUMPTION (EQUAL)	-1.17%	CNX FMCG (CAP)	-3.22%
NI15 (EQUAL)	-3.04%	CNX PHARMA (CAP)	-3.66%
CNX AUTO (EQUAL)	-3.47%	CNX MNC (CAP)	-4.11%
CNX MEDIA (EQUAL)	-6.28%	CPSE INDEX (CAP)	-4.28%
CPSE INDEX (EQUAL)	-6.60%	CNX ENERGY (CAP)	-4.36%
CNX INFRA (EQUAL)	-7.32%	CNX COMMODITIES (CAP)	-5.60%
CNX PHARMA (EQUAL)	-7.44%	NI15 (CAP)	-5.95%
CNX PSE (EQUAL)	-7.49%	LIX15 Midcap (CAP)	-6.08%
NV20 (EQUAL)	-7.55%	CNX METAL (CAP)	-6.69%
LIX15 Midcap (EQUAL)	-8.18%	CNX PSE (CAP)	-7.01%
CNX COMMODITIES (EQUAL)	-8.38%	CNX PSU BANK (CAP)	-7.08%
CNX ENERGY (EQUAL)	-8.86%	NV20 (CAP)	-7.67%
CNX PSU BANK (EQUAL)	-8.87%	CNX INFRA (CAP)	-7.67%
CNX BANK (EQUAL)	-9.34%	LIX 15 (CAP)	-8.92%
CNX SERVICE (EQUAL)	-9.86%	CNX BANK (CAP)	-9.13%
LIX 15 (EQUAL)	-10.57%	CNX SERVICE (CAP)	-9.42%
CNX FINANCE (EQUAL)	-10.84%	CNX FINANCE (CAP)	-9.51%
CNX METAL (EQUAL)	-11.02%	CNX MEDIA (CAP)	-9.79%
CNX IT (EQUAL)	-12.03%	CNX IT (CAP)	-11.63%
CNX REALTY (EQUAL)	-16.15%	CNX REALTY (CAP)	-16.09%

Trend Model Summary

Index	Signal	% From Peak	Day of Peak
CNX AUTO	SHORT	6.15	2015-Jan-27
CNX BANK	SHORT	11.54	2015-Jan-27
CNX ENERGY	SHORT	30.63	2008-Jan-14
CNX FMCG	SHORT	10.31	2015-Feb-25
CNX INFRA	SHORT	50.32	2008-Jan-09
CNX IT	SHORT	88.30	2000-Feb-21
CNX MEDIA	SHORT	31.75	2008-Jan-04
CNX METAL	SHORT	55.90	2008-Jan-04
CNX MNC	SHORT	5.04	2015-Mar-12
CNX NIFTY	SHORT	8.16	2015-Mar-03
CNX PHARMA	SHORT	11.11	2015-Apr-08
CNX PSE	SHORT	27.10	2008-Jan-04
CNX REALTY	SHORT	89.34	2008-Jan-14

It looks like Autos and Pharma may be green-shooting. A rate cut would help autos and rupee depreciation can act as a tailwind for pharma.

Categories Your Money Tags index, momentum, weekly

Practical Momentum, Part I

shyam May 15, 2015 0

Introduction

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.

Long-only Momentum

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:

Long-short Momentum

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.

Conclusion

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!

Categories Investing Insight, Your Money Tags momentum, quant