How it Works:

This is a rotational, dual-momentum strategy, meaning that the system looks first to the long-term trend of the broader market (in this case, the S&P 500) and if the long term trend is up, the system looks to hold the strongest performing stocks. Twice per month, the long term trend is checked and the system rebalances to hold the strongest performing stocks.

The system operates on two trading days each month - the second day the market is open for the month, and around the middle day the market is open for the month. Since there are approximately 20 trading days in each month, the system will usually trade on day 2 and day 12 (see the system trade date page for exact dates of the rebalance). The portfolio is divided into two buckets of equal size, and the same rules are applied to each bucket, just with different lookbacks (time frames) for the indicators used to evaluate the broader market and individual stocks. Using different lookbacks makes the system more Robust.

For bucket 1:

  • On the last day of every month, we check the long term trend of the stock market…
    • If the long term trend is down...
      • The Alpha Momentum Strategy moves bucket 1 of the portfolio to cash or Tbills – we do not want to be invested in the stock market with bucket 1 if the long term trend is down
    • If the long term trend is up...
    • The Alpha Momentum Strategy will invest in the stock market, using the following method:
  • The Alpha Momentum Strategy…
    • Screens the S&P 500 to eliminate stocks that meet certain criteria that make them less likely to go up
    • Ranks the remaining stocks by a proprietary momentum score with a long term lookback
    • Invests in the top 10 stocks as measured by the momentum score and holds them until the end of the month

For bucket 2:

  • On the middle day of every month (usually around the 15th of the month), we check the medium term trend of the stock market...
    • If the medium term trend is down...
      • The Alpha Momentum Strategy moves bucket 2 of the portfolio to cash or Tbills – we do not want to be invested in the stock market with bucket 2 if the medium term trend is down
      • If the medium term trend is up...
      • The Alpha Momentum Strategy will invest in the stock market, using the same method as for bucket 1, but using a medium term lookback period for analysis

If you are following along as a subscriber:

While this may seem confusing, it is incredibly easy to follow along. You will get two reports per month. Each report will list the model portfolio weightings. At most, there will be 20 positions in the portfolio. At least, there will be 0 positions in the portfolio (full defensive mode, 100% of the model portfolio is in cash/Tbills). The model portfolio moves to 100% cash when the model determines that both the long and medium term trends of the broader market are down, and thus we are looking to protect principal rather than grow it until more favorable market conditions become apparent. 

At any given time, the portfolio will be in one of three states:

  1. 100% invested, 0% in cash
    • Both medium and long term trend of the broader market is higher
    • Most common
  2. 50% invested in stocks, 50% in cash
    1. Either:
      1. Long term trend of broader market is higher and medium term trend of broader market is lower, or...
      2. Medium term trend of broader market is higher and long term trend of broader market is lower
  3. 0% invested in stocks, 100% in cash
    1. When both the long and medium term trends of the broader market are lower

Sample report:

The above example is a sample portfolio rebalance report. In the above example, you can see the following adjustments to be made on close of the following trading day:

  • Weighting adjustments: BAC, CDNS, DHI, HPQ, NRG, NWS, and RF
  • New buys: CSCO, FCX, FLR, FOX, GPS, MRO
  • Sells: HBAN

Interested? Reach out to learn more.