Alpha Momentum Portfolio - August, 2019 - First Rebalance & Performance Report


As per the Alpha Momentum Strategy, trend signals in US equities are up. As such, the model portfolio will remain fully invested. We will make changes to the model portfolio to reflect the following composition as of close tomorrow.



It has been a relatively difficult time period to be invested in this strategy over the last 10 months. Not only is the strategy in drawdown, but it is trailing its benchmark by about 20%! Unfortunately, this type of performance, while not common in the backtest, has indeed occurred in historical testing.

Just as a systematic trader should assume that his worst drawdown will be worse than his worst backtested drawdown, he should assume that his worst period of relative underperformance will likely be worse than his worst period of backtested underperformance.

These periods of drawdown and underperformance can make a system very difficult to stick with. The best way to handle this discomfort is to step back and reexamine the research behind the strategy and think about why you started trading it to begin.

On our page titled “Data, Supporting Evidence, In-Depth Discussion,” we wrote the following on The Alpha Momentum Strategy:

So is this the holy grail?

NO! Since this is a systematic or rules-based strategy, the mental cost of decision making in the portfolio management process is significantly reduced relative to a discretionary trading strategy. That said, in order to achieve the results of the strategy, an investor has to faithfully commit to actually trading the strategy. There will be times when the strategy underperforms Buy & Hold, sometimes these times of underperformance will be extended in duration, and sometimes the underperformance will be significant (for example, there were three periods - early 1989, early 1991, early 2010 - when the system underperformed buy & hold on a trailing 12 month basis by 20% or more). An investor would need the fortitude to stick with the strategy throughout these periods of relative underperformance in order to reap the benefits of the strategy. There is no easy way around this. Any strategy that significantly outperforms passive investing will have times of underperformance - this is the way of the investment world, and anyone who tells you differently is likely trying to con you. Before starting to trade a system, it is important that an investor understands that there will be periods of underperformance and has committed to seeing the strategy through these difficult times.

For more context on the strategy, you can read through the OVERVIEW and discussion pages, and for context on periods of underperformance, you can read through THIS article.

Thanks for following along!

Alpha Momentum Strategy - Portfolio Update - April, 2019 - First Rebalance

As per the Alpha Momentum Strategy, both the medium and long term trends of stocks here in the US are higher. As such, the portfolio will remain 100% invested, and will reflect the following composition as of close of trade tomorrow:

The performance of the strategy since website inception is as follows.

The model is underperforming US equities, but periods of underperformance will occur and this isn’t something to fret over. The cost of significant outperformance over the long term is that sometimes we must endure (sometimes significant) underperformance in the short term.

Inability to endure periods of underperformance in fundamentally sound strategies is one of the reasons that dollar-weighted returns in the mutual fund industry are so bad. Investors herd into strategies after a couple years of relative outperformance. The pendulum swings the other way, and investors have a hard time sticking with the strategy during the underperforming times. No strategy can outperform at all times.

We wrote an extended piece on tough (relative) times just over a year ago; you can read it HERE.

Thanks for following along!

Alpha Momentum Strategy - Portfolio Report – February 2019, Second Half

As per the Alpha Momentum Strategy: The long term trend of the US stock market is down, while the short term trend is up. As such, half of the portfolio will be invested in stocks, with the balance in cash/equivalents. We will execute trades such that the model portfolio reflects the following composition as of close of trade on 2/19/19.

Performance since website inception:

Alpha Momentum Strategy - Portfolio Report, Performance, Commentary – January 2019, Second Half

As per The Alpha Momentum Strategy:

Both the intermediate and long term trends of US stocks are lower. As such, the portfolio will remain 100% in cash/equivalents (no stock market exposure).

Portfolio Performance since Website Inception

Commentary: It was a tumultuous time to be invested in US stocks in the 4th quarter of 2018 – domestic equities saw some real volatile price action! With moves in indices as aggressive as they were, most medium term traders who followed their daily PnL likely experienced several instances of feeling like a hero relative to the indices one day, and a zero the next (assuming a non-trivial degree of active share, of course).

Volatility in stock prices can cause stress on investors and traders, and it is in times of stress when investors and traders often make their worst decisions. It is partially for this reason that systematic trading and investing confers an edge for those who are willing to pursue it.

By relying on systems that have been well researched and tested, that have demonstrated edge, and those that are robust and evidence based, a trader or investor is able bypass the effects of this stress on their trading process. So long as the trader doesn’t override his system or make a careless mistake, the elevated stress that the trader feels makes absolutely no difference whatsoever on the investments in his accounts. By circumventing this “emotional trap”, systematic traders gain a meaningful edge over the narrative driven mainstream trading community.

Side note: See the article at the link below. This is a good piece by Corey Hoffstein on robusticity with regard to a systematic dual momentum approach (as outlined by Gary Antonacci). The Alpha Momentum Strategy, outlined on this website, “borrows” several concepts from Antonacci’s work (among others’). Hoffstein points to the massive dispersion in performance that can occur between different parameterizations of the same system (e.g. use a 200 day moving average for one iteration, and a 150 day moving average for another iteration). This is precisely why we rebalance more than once per month and use several different parameterizations in our models - to (attempt to) avoid getting unlucky and ending up with the worst iterations in real time trading. We have written about this before on our blog (see that article HERE), and Hoffstein does a great job of covering this topic from another angle. See Hoffstein’s piece HERE.

Thanks for following along!

Alpha Momentum Strategy - Portfolio Review - January, 2019 - First Half

As per the Alpha Momentum Strategy, both the medium and long term trends of US stocks are down. As such, the portfolio will move to 100% cash / short term equivalents at the open of trade tomorrow. We will put out a more comprehensive discussion, including performance, later this week,

Here’s to a prosperous, happy and healthy New Year…thanks for following along!

Alpha Momentum Strategy - Portfolio Report – December, 2018 – Second Half

As per The Alpha Momentum Strategy:

The intermediate trend of the S&P 500 is down

The long term trend of the S&P 500 is up

We will be making no changes to the portfolio for this rebalance.

Recall that, as of 12/3, half the portfolio was invested and half the portfolio was in cash/equivalents. While we never like to lose money, the fact that we have been only half invested throughout December has kept losses relatively contained. With the S&P 500 -7.8% for the month, the Alpha Momentum Portfolio is -3.5% on the month.

Drawdowns happen even to good trading strategies. Having a strategy that is rooted in evidence-based analysis, is robust, and is quantitative (no guesswork or predictions needed), makes sticking with the strategy and making good decisions in difficult times easier. While the talking heads on TV banter back and forth about what the future will bring, we just run our system and let the cards fall where they may - over the long term, we have a significant edge, and we are happy to let that play out over time.

We will check the system again at the beginning of January and make any changes as necessary.

Until then, have a happy and healthy holiday season!

Alpha Momentum Strategy - Portfolio Report - November, 2018 - First Half

As per The Alpha Momentum Strategy:

  • The intermediate trend of the S&P 500 is down

  • The long term trend of the S&P 500 is down

When the system determines that the trend of the S&P 500 is down on both time frames, we take a defensive stance and move the entire portfolio to cash. We move to cash in order to protect capital and avoid a deep and prolonged drawdown.

What is the risk in moving the portfolio to cash? The risk is that the market quickly regains strength and continues higher without us. While our model shows that this can certainly happen (and often does), our model shows us that by taking the risk of missing out on some upside performance, we are increasing the likelihood that we avoid drawdowns of 30%+ like those seen in the early 2000s and during the Great Financial Crisis. This is a risk that we want to take.

We will be selling out of all positions tomorrow at the open.