Tag: momentum

Are Stop-Losses Worth It? Part II

shyam May 2, 2019

We saw how, in aggregate, stop-losses do not add any value to a momentum portfolio after taxes and transaction costs (Are Stop-Losses Worth It?) When you dig a little deeper into the actual positions that get stop-lossed and analyze their subsequent returns, we find that, on average, subsequent returns are not negative enough to justify trading costs.

During mid-2016 through April-2019 Bull and Bear phases

Here’s how the Momo (Relative) v1.1 Theme’s stop-lossed positions behaved 20-days after they got booted out, mid-2016 through April-2019:

Summarized statistics across different holding periods:

Now let’s partition the total period into two. The first part covers the “bullish” market of mid-2016 through Dec-2017 and the second Jan-2018 through April-2019.

During the mid-2016 through Dec-2017 Bull

Summarized statistics across different holding periods:

During the Jan-2018 through April-2019 Bear

Summarized statistics across different holding periods:

Conclusion

When looked at from the perspective of a single position, a stop-loss removes red ink and is out-of-sight/out-of-mind. However, it is only when you look at their subsequent returns in the aggregate, that you realize that peace-of-mind comes at a cost.

During the bull phase, when the whole market was shooting higher, stop-lossed positions recovered from their losses. Note how the skew is slightly positive. Stop-losses here were a definite drag after taking costs into account.

During the bear phase, it does look like stop-losses helped – the subsequent returns of stop-lossed positions were skewed left. However, as we saw in our previous post, in aggregate, they did not add value after taking costs into account.

Categories Investing Insight Tags momentum, returns

Are Stop-Losses Worth It?

shyam April 25, 2019

StockViz introduced Themes back in August 2013. We went live with two strategies: Momentum, rebalanced once a month, and Quality to Price, rebalanced once a quarter. The Modi bull market was just getting started and returns were spectacular in the beginning. Here is Momentum, from Jan-2014 through Dec-2015:

And then, in Jan-2016, the Chinese market crash rippled through world financial markets (WaPo). Momentum collapsed. This is the previous chart extended to June-2016:

Momentum investors clamored for a safety net. Enter stop-losses. We created a new set of Themes, called Momos, that had a 5% trailing stop loss at the position level. Positions hitting the stop loss were substituted with stocks that had favorable momentum and trend. The logic was that if the entire market crashed, the strategy would be in cash until stocks gained momentum. We introduced these Themes in June and they worked as advertised on the subsequent market correction in November that year. Idea validated? Here is a chart comparing the returns of Momentum (vanilla) vs. Momo (Relative) v1.1:

Momo trails its plain-vanilla counterpart over a ~3 year period. There has been plenty of volatility during that time – November 2016, August 2017 and January 2018 through now. And Momo traded a lot more than its plain-vanilla counterpart (the turnover charts are on the Theme pages linked above) through these bouts of volatility. And what was saved through stop-losses was paid for in taxes and transaction costs. Here is a chart that shows the Momo strategy with and without transaction costs:

So, are stop-losses worth it? Probably not. It is very difficult to de-risk a high-risk strategy intrinsically. It is better for investors to focus on asset allocation to bring down overall portfolio volatility to a level that they can bear. Think of it like trying to tame a tiger. You may very well succeed. But a tame tiger is a cat.

Categories Investing Insight Tags momentum, returns

Momentum vs. Low Volatility

shyam March 19, 2019

Is the low-volatility anomaly overrated?

Investors may be giving up on the significantly higher returns of a momentum strategy in favor of slightly lower drawdowns of a low-volatility strategy. They maybe better off managing overall portfolio risk through a bond allocation rather than tilting away from momentum.

Categories Investing Insight Tags momentum

Dual Momentum: NIFTY vs MIDCAP

shyam March 7, 2019

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:

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:

Backtest

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

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?

Here are its worst drawdowns:

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.

Categories Investing Insight Tags backtest, momentum

Global Equities Momentum Trades and Portfolio

shyam March 1, 2019March 1, 2019

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!

Categories Investing Insight Tags momentum