Author Topic: Dual Momentum Investing  (Read 215618 times)

boarder42

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Re: Dual Momentum Investing
« Reply #50 on: April 16, 2015, 05:53:40 AM »
also sirdoug some of your numbers dont line up.  on 10/1 2014 VFINX was at 177 not 184.  so i'm not sure where you data came from but its not 100% lining up
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Re: Dual Momentum Investing
« Reply #51 on: April 16, 2015, 06:02:51 AM »
In a straight comparison of VFINX to DFALX i see .28% return for the S&P and .56% return for the Large cap international

This is what I'm using:

http://stockcharts.com/freecharts/perf.php?VFIAX,vtmgx,vemax,vfisx

I slide the date range to approx 126 (6 months, 21 sessions per month on average). Results vary with the funds/etfs chosen, as their compositions differ.

Great website but I have a question.  When comparing your funds you use the 6- or 12- or X-month average, but the perfcharts show moving daily values.  To get that info, do I just change to the histogram view?

Also, if someone knows how to put the TSP funds in to compare that would be helpful to me.

Crushtheturtle

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Re: Dual Momentum Investing
« Reply #52 on: April 16, 2015, 08:25:07 AM »
In a straight comparison of VFINX to DFALX i see .28% return for the S&P and .56% return for the Large cap international

This is what I'm using:

http://stockcharts.com/freecharts/perf.php?VFIAX,vtmgx,vemax,vfisx

I slide the date range to approx 126 (6 months, 21 sessions per month on average). Results vary with the funds/etfs chosen, as their compositions differ.

Great website but I have a question.  When comparing your funds you use the 6- or 12- or X-month average, but the perfcharts show moving daily values.  To get that info, do I just change to the histogram view?

Also, if someone knows how to put the TSP funds in to compare that would be helpful to me.

Yes, histogram gives cumulative total return over the selected date range.

For TSP funds, I use tspcenter.com --> charts and returns

691175002

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Re: Dual Momentum Investing
« Reply #53 on: April 16, 2015, 08:51:51 AM »
A long-only momentum portfolio is roughly equivalent to 50% long/short momentum and 50% benchmark, so the arguments still apply.  A long-only strategy will reduce drawdown through diversification and potentially achieve higher risk adjusted returns, but you are still adding exposure to a skewed risk premium.

The most accurate way to backtest momentum would be to find a set of rules that were published many years ago and apply them exactly as written on market data following their discovery.  Unfortunately, this will introduce survivorship bias since it is likely that unsuccessful rules have been forgotten.  Similarly, looking at historical performance of funds which claim to have used this strategy is not robust.  It is impossible to avoid survivorship and selection bias that far back because funds are so transient and information on the strategies they used is very sparse.

Any rule that has been tested on data gathered before its creation will be biased to some degree.  Even if you avoid explicit in-sample curve fitting it is impossible for a person to ignore their own knowledge.  Just the idea of testing momentum was not obvious 15 years ago. 

Choosing to test dual momentum is a decision based on future knowledge (the fact that layered momentum strategies have worked) which implicitly biases returns upwards even if all testing is done on out-of-sample historical data.  This doesn't mean that dual momentum does not work, just that the backtested returns must be biased to some degree.  If the backtest was performed carefully the difference could be very small, but if parameters were fit in sample or rules were chosen using the investors knowledge of what has recently worked then the bias could be very large.

Quote
Men Faber showed that by simply lowering the shorted stocks by 20% for every 10% decline in the market, it effectively wiped out the previous momentum crashes from the backtest. Of course, you could also just apply momentum in a long-only basis and skip the crashes as well.
This is an example of trading rules that have been chosen to fit historical data .  There may be compelling theoretical reasons as to why it works, but it is still difficult to put confidence in such a strategy going forward.

Quote
I believe that this is what Warren Buffett was getting at when he said that the first rule of investing was: don't lose money and that the second rule of investing was: see rule number one.
This skips the most important part of his philosophy, which is that risk is the permanent loss of capital.  Both his words and actions show that he is not afraid of unrealized losses, and thinks that selling depressed assets is far riskier than buy and hold. ( http://www.mutualfundobserver.com/2013/10/permanent-loss-capital/ )

I'm not arguing against momentum as a strategy, I am even exposed to momentum in my personal accounts.  I just find that most of the information available is not fairly represented - in particular the idea that backtests can represent unbiased future returns is dangerous.

boarder42

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Re: Dual Momentum Investing
« Reply #54 on: April 16, 2015, 08:56:19 AM »
In a straight comparison of VFINX to DFALX i see .28% return for the S&P and .56% return for the Large cap international

This is what I'm using:

http://stockcharts.com/freecharts/perf.php?VFIAX,vtmgx,vemax,vfisx





I slide the date range to approx 126 (6 months, 21 sessions per month on average). Results vary with the funds/etfs chosen, as their compositions differ.

Great website but I have a question.  When comparing your funds you use the 6- or 12- or X-month average, but the perfcharts show moving daily values.  To get that info, do I just change to the histogram view?

Also, if someone knows how to put the TSP funds in to compare that would be helpful to me.

Yes, histogram gives cumulative total return over the selected date range.

For TSP funds, I use tspcenter.com --> charts and returns

how do i turn on histogram?
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Crushtheturtle

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Re: Dual Momentum Investing
« Reply #55 on: April 16, 2015, 09:13:05 AM »
Should be the bar graph button (contains red and green squares) just to the left of the date slider.

frugalnacho

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Re: Dual Momentum Investing
« Reply #56 on: April 16, 2015, 09:55:55 AM »
This strategy seems to be the opposite of all the books and advice i've read about investing, and sounds like market timing, guaranteeing you are buying in on the way up.

If the strategy works so well why isn't there a vanguard fund that takes advantage of it?  I mean if milesdividendmd can own a small set of funds and rebalance them to take advantage of this, then why can't vanguard build a similar fund that out performs the market as a whole?  I guess my next question is not only why isn't there a fund for it already, but why isn't everyone and their mother already in that fund?  Or is this because the strategy has only been recently realized and not exploited by everyone and their mother yet, but as soon as everyone catches on it will?

Crushtheturtle

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Re: Dual Momentum Investing
« Reply #57 on: April 16, 2015, 10:55:25 AM »
^^^
In Miles' posts linked earlier, he addresses some of your points. Momentum goes against the way that the market works according to both active traders and passive investors. That's why it is not intuitively pursued by either.

And short term performance is at least as good as long term performance (buy and hold) when deciding where to invest. Search for "Adaptive Asset Allocation: A Primer."

« Last Edit: April 16, 2015, 11:09:50 AM by Crushtheturtle »

arebelspy

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Re: Dual Momentum Investing
« Reply #58 on: April 16, 2015, 11:12:49 AM »
Momentum goes against the way that the market works according to both active traders and passive investors. That's why it is not intuitively pursued by either.

That doesn't answer the question.  Not being intuitive is a reason to not think of it.  It's not a reason not to implement (after research).  Even if it's not intuitive, the idea is out there, and if it works, why wouldn't there be a fund utilizing it?
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frugalnacho

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Re: Dual Momentum Investing
« Reply #59 on: April 16, 2015, 11:39:47 AM »
^^^
In Miles' posts linked earlier, he addresses some of your points. Momentum goes against the way that the market works according to both active traders and passive investors. That's why it is not intuitively pursued by either.

And short term performance is at least as good as long term performance (buy and hold) when deciding where to invest. Search for "Adaptive Asset Allocation: A Primer."

I haven't had time to read through his links (or nearly anything about momentum investing) yet, this is just my initial reaction to the concept.  It looks like it's classic market timing; get in on the way up, and get out on the way down, rinse and repeat.  Everything i've read so far, and all the evidence i've seen seem to suggest that can't be successfully done though.  I will reserve judgement until after i've done some reading up, but i'm a bit skeptical right now the reasons I previously mentioned.

brooklynguy

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Re: Dual Momentum Investing
« Reply #60 on: April 16, 2015, 12:30:16 PM »
That doesn't answer the question.  Not being intuitive is a reason to not think of it.  It's not a reason not to implement (after research).  Even if it's not intuitive, the idea is out there, and if it works, why wouldn't there be a fund utilizing it?

Exactly.  Miles attempted to answer a variant of the same question in this post on his blog, but his answers similarly fail to explain why, if this method works and can be executed via a simple algorithm, an investment fund does not exist to put the strategy into practice.  I haven't read enough about this strategy yet to form a view one way or the other, but it seems that if it really works then the only possible explanation is what frugalnacho said:  that the strategy hasn't been "discovered" yet by the mutual fund industry and it's only a matter of time before it is (the same reason that explains the punchline to the joke about the economist arguing that a $20 bill on the floor can't possibly exist, because if it did someone would have already picked it up).

RobertMa

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Re: Dual Momentum Investing
« Reply #61 on: April 16, 2015, 03:22:53 PM »
In the literature I read, it seems that a 12 month lookback period supposedly give better results than a six month period. Miles, how did you settle on 6 months?

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Dual Momentum Investing
« Reply #62 on: April 16, 2015, 06:04:24 PM »
That doesn't answer the question.  Not being intuitive is a reason to not think of it.  It's not a reason not to implement (after research).  Even if it's not intuitive, the idea is out there, and if it works, why wouldn't there be a fund utilizing it?

Exactly.  Miles attempted to answer a variant of the same question in this post on his blog, but his answers similarly fail to explain why, if this method works and can be executed via a simple algorithm, an investment fund does not exist to put the strategy into practice.  I haven't read enough about this strategy yet to form a view one way or the other, but it seems that if it really works then the only possible explanation is what frugalnacho said:  that the strategy hasn't been "discovered" yet by the mutual fund industry and it's only a matter of time before it is (the same reason that explains the punchline to the joke about the economist arguing that a $20 bill on the floor can't possibly exist, because if it did someone would have already picked it up).

I think that one question you could ask yourself is:

"If I knew that everyone in the world was going to implement a dual momentum strategy, how could I use that information to front run the market?" 

I alluded to this above, but if everyone decided to use momentum, the result would be… More momentum.  This is in stark contrast to value, were the crowding of value causes a loss of value.

The other problems with starting a dual momentum ETF are of course impact factors (I.e. it is much cheaper for me to buy 50 shares of SPY, then it is for a  fund to buy 50,000), and marketing. Who would pay for such a simple strategy, when they look at the assets under management and all they see is a single vanguard S&P 500 fund?
« Last Edit: April 16, 2015, 06:10:59 PM by milesdividendmd »
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Dual Momentum Investing
« Reply #63 on: April 16, 2015, 06:10:03 PM »
In the literature I read, it seems that a 12 month lookback period supposedly give better results than a six month period. Miles, how did you settle on 6 months?

The optimal time period for a Lookback  is an unresolved  question.

What is clear is that the longer The Lookback period, the less trades you will make (Which is a very good thing.)

What is also clear is that with dual momentum you will exit risky assets when they have underperformed T-bills for your Lookback period.  this means that A longer Lookback period will mean that you will stay in the bear market a little bit longer, and get back into the recovery in little bit later.

From a behavioral standpoint, I felt that limiting drawdowns was attractive for me personally.

The look back should be between three and 12 months,  or a combination of multiple time periods in that range.
« Last Edit: April 16, 2015, 06:50:57 PM by milesdividendmd »
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Re: Dual Momentum Investing
« Reply #64 on: April 17, 2015, 04:45:24 AM »
Late to the party...following.
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Re: Dual Momentum Investing
« Reply #65 on: April 17, 2015, 06:37:08 AM »
Read this book and it got me interested.  Next month I am going to try a variation of it out with my play money.  Plan on using the top 50 stocks from the Vanguard Total Market as well as a total international ex US (VEU) and US Bond fund (BND) and then investing in the 5 with the highest 12 month returns.  It was a pita but I made a little spreadsheet with all 52 stocks that will back calc the 12 month returns and pick the top 5 for me and I will just buy/sell/hold depending on the results. A little back testing shows about a trade every month or so.  Will result in a few more then 2 trades a year, but I thought it would be fun to do with my play money instead of just my random picking.  It will be in taxable so all short term gains/losses, but it will be a small enough amount to not really make a difference.

Looks like May 1 will be Apple, Amgen, UnitedHealth, Biogen, and Celgene unless things drastically change in the next 13 days.  I plan on evenly splitting a $ value to each at the start and then just letting the gains ride until I need to sell the stock based on the charts.

Always have been a simple 5 fund portfolio guy so this is my first time dabbling in this kind of stuff.

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Re: Dual Momentum Investing
« Reply #66 on: April 17, 2015, 07:50:54 AM »
I think that one question you could ask yourself is:

"If I knew that everyone in the world was going to implement a dual momentum strategy, how could I use that information to front run the market?" 

I alluded to this above, but if everyone decided to use momentum, the result would be… More momentum.  This is in stark contrast to value, were the crowding of value causes a loss of value.

I'm having a difficult time understanding this logic.  If everyone did momentum investing the result would be more momentum, but i'm not exactly sure how that translates into a winning strategy.  It seems to me that if everyone did momentum investing, then no one would beat the market, because they collectively are the market, by definition.  You couldn't beat the market on the way up, or the way down, you would simply get market returns just like everyone else.  Unless you create a speculative bubble with run away momentum that just keeps increasing, but then whats the end game for that? Bubbles pop eventually, and not everyone can get out and minimize losses, if they could then by definition the bubble would not have popped, it would still be inflated indefinitely.

It's similar to the economist joke mentioned above, except instead of "just noticing" the $20 bill on the ground, the bill was noticed decades ago, and has had numerous papers and books written about it, and had thousands of people point it out.  It makes the joke significantly less funny, but also makes me wonder if the $20 bill is in fact real and has been sitting there for decades then why has no one picked it up?

hodedofome

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Re: Dual Momentum Investing
« Reply #67 on: April 17, 2015, 08:07:05 AM »
^^^
In Miles' posts linked earlier, he addresses some of your points. Momentum goes against the way that the market works according to both active traders and passive investors. That's why it is not intuitively pursued by either.

And short term performance is at least as good as long term performance (buy and hold) when deciding where to invest. Search for "Adaptive Asset Allocation: A Primer."

I haven't had time to read through his links (or nearly anything about momentum investing) yet, this is just my initial reaction to the concept.  It looks like it's classic market timing; get in on the way up, and get out on the way down, rinse and repeat.  Everything i've read so far, and all the evidence i've seen seem to suggest that can't be successfully done though.  I will reserve judgement until after i've done some reading up, but i'm a bit skeptical right now the reasons I previously mentioned.

That's because you've been reading the wrong research. If you instead read stuff from Jesse Livermore, William O'Neil, Michael Covel, Alex Greyserman, Andreas Clenow, Meb Faber, Gary Antonnacci, Jack Schwager and others, you'd know that market timing (when done correctly) does work. It's only because Ben Graham first said it (that market timing is impossible), and Buffett reiterated it, that so many believe it.

Momentum strategies can be considered 'market timing' and they were first 'discovered' by academics in 1993, but were used by traders for hundreds of years beforehand. Even Fama acknowledges it to be the premier market anomaly, so anyone thinking that market timing is impossible has just had their head in the sand for the past 20+ years.

Once again, funds have been successfully timing the market and using momentum/trend following for decades. They are called Managed Futures Hedge Funds. See actual performance, after ridiculously high (2% management + 20% performance) fees:

http://www.iasg.com/Groups/group/EMC-Capital-Advisors-LLC/Program/classic
http://www.iasg.com/Groups/group/mark-j-walsh-co/Program/standard-program
http://www.iasg.com/Groups/group/abraham-trading-company/Program/Diversified-Program
http://www.iasg.com/Groups/group/chesapeake-capital/Program/diversified
http://www.iasg.com/Groups/group/hawksbill-capital-management/Program/global-diversified
http://www.iasg.com/Groups/group/dunn-capital-management/Program/World-Monetary-and-Agriculture-Program-WMA-#prog_snapshot
http://www.iasg.com/Groups/group/mulvaney-capital-management/Program/The-Mulvaney-Global-Markets-Program
http://www.iasg.com/Groups/group/ISAM/Program/ISAM-Systematic-Fund-Class-A-USD- (This is the fund that Alex Greyserman is the chief scientist of, and who's book I linked to earlier in this post)

Why you don't see these strategies in mutual funds for the past 30 years is for a few reasons. 1) It took a long time for people to figure out how to legally run a managed futures hedge fund under a mutual fund wrapper. 2) Once they did figure it out, the fees are so high that they generally suck. See here:

http://managed-futures-blog.attaincapital.com/2013/10/21/no-bloomberg-the-managed-futures-industry-is-not-a-scam/

To run a diversified managed futures program yourself, you generally need about $1 million to start with. Anything less and you'll be insanely leveraged. Once ETFs came about, it became much easier (and cheaper) for non-rich people to access these types of strategies. They can either do it themselves or purchase GMOM. GTAA was a previous implementation of diversified trend following but the fees were way too high and it was too complex IMO. GMOM uses dual momentum and purchases the top 10 ETFs based on momentum from a list of like 100 funds covering stocks, bonds, real estate and commodities. I don't know what the lookback period is, nor do I know how often it is rebalanced. It is long-only.
« Last Edit: April 17, 2015, 08:12:28 AM by hodedofome »

sirdoug007

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Re: Dual Momentum Investing
« Reply #68 on: April 17, 2015, 08:15:00 AM »
also sirdoug some of your numbers dont line up.  on 10/1 2014 VFINX was at 177 not 184.  so i'm not sure where you data came from but its not 100% lining up

Thanks for noting I was only looking back 5 months.  I'll fix that but I can't imagine it changes the conclusions much.

I got the price data from Yahoo! finance.  I used monthly prices with adjusted close data.  On 10/1/2014 VFINX opened at 179.59 and closed at 186.40.  The adjusted close was $184.50.  The adjusted close accounts for a $0.826 dividend paid on 9/19/2014.  Here is a link.  I'm pretty sure their info is accurate: http://finance.yahoo.com/q/hp?s=VFINX&a=00&b=2&c=1980&d=03&e=17&f=2015&g=m

Here is how Yahoo! does adjusted closing prices: https://help.yahoo.com/kb/finance/historical-prices-sln2311.html
« Last Edit: April 17, 2015, 08:38:23 AM by sirdoug007 »

milesdividendmd

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Dual Momentum Investing
« Reply #69 on: April 17, 2015, 09:06:49 AM »
I think that one question you could ask yourself is:

"If I knew that everyone in the world was going to implement a dual momentum strategy, how could I use that information to front run the market?" 

I alluded to this above, but if everyone decided to use momentum, the result would be… More momentum.  This is in stark contrast to value, were the crowding of value causes a loss of value.

I'm having a difficult time understanding this logic.  If everyone did momentum investing the result would be more momentum, but i'm not exactly sure how that translates into a winning strategy.  It seems to me that if everyone did momentum investing, then no one would beat the market, because they collectively are the market, by definition.  You couldn't beat the market on the way up, or the way down, you would simply get market returns just like everyone else.  Unless you create a speculative bubble with run away momentum that just keeps increasing, but then whats the end game for that? Bubbles pop eventually, and not everyone can get out and minimize losses, if they could then by definition the bubble would not have popped, it would still be inflated indefinitely.

It's similar to the economist joke mentioned above, except instead of "just noticing" the $20 bill on the ground, the bill was noticed decades ago, and has had numerous papers and books written about it, and had thousands of people point it out.  It makes the joke significantly less funny, but also makes me wonder if the $20 bill is in fact real and has been sitting there for decades then why has no one picked it up?

I don't necessarily disagree with this analysis.The problem is that it ignores the context of the question being answered.

In the referenced quote I was not arguing that if everyone adopted a dual momentum strategy, Then everyone would "beat the market."

I was responding to a specific question: if it's such a great approach, why isn't everyone doing it, and why are there no dual momentum mutual funds?

The point that I was making is that if everyone theoretically adopted such a strategy, it would still be difficult to arbitrage away  it's strengths because of the unique properties of momentum (its paradoxical positive feedback loop to crowding.)

As to the $20 allegory. The entire point of the joke is to poke fun at economists views of a perfectly efficient market and of human beings as perfectly rational players.

Momentum is a bet on the counternarrative: human irrationality.

So the punchline of the joke might be for a trend follower to come and pick up the $20 as the economists continue to discuss the quandary.
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frugalnacho

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Re: Dual Momentum Investing
« Reply #70 on: April 17, 2015, 09:21:38 AM »
I think that one question you could ask yourself is:

"If I knew that everyone in the world was going to implement a dual momentum strategy, how could I use that information to front run the market?" 

I alluded to this above, but if everyone decided to use momentum, the result would be… More momentum.  This is in stark contrast to value, were the crowding of value causes a loss of value.

I'm having a difficult time understanding this logic.  If everyone did momentum investing the result would be more momentum, but i'm not exactly sure how that translates into a winning strategy.  It seems to me that if everyone did momentum investing, then no one would beat the market, because they collectively are the market, by definition.  You couldn't beat the market on the way up, or the way down, you would simply get market returns just like everyone else.  Unless you create a speculative bubble with run away momentum that just keeps increasing, but then whats the end game for that? Bubbles pop eventually, and not everyone can get out and minimize losses, if they could then by definition the bubble would not have popped, it would still be inflated indefinitely.

It's similar to the economist joke mentioned above, except instead of "just noticing" the $20 bill on the ground, the bill was noticed decades ago, and has had numerous papers and books written about it, and had thousands of people point it out.  It makes the joke significantly less funny, but also makes me wonder if the $20 bill is in fact real and has been sitting there for decades then why has no one picked it up?

I don't necessarily disagree with this analysis.The problem is that it ignores the context of the question being answered.

In the referenced quote I was not arguing that if everyone adopted a dual momentum strategy, Then everyone would "beat the market."

I was responding to a specific question: if it's such a great approach, why isn't everyone doing it, and why are there no dual momentum mutual funds?

The point that I was making is that if everyone theoretically adopted such a strategy, it would still be difficult to arbitrage away  it's strengths because of the unique properties of momentum (its paradoxical positive feedback loop to crowding.)

As to the $20 allegory. The entire point of the joke is to poke fun at economists views of a perfectly efficient market and of human beings as perfectly rational players.

Momentum is a bet on the counternarrative: human irrationality.

So the punchline of the joke might be for a trend follower to come and pick up the $20 as the economists continue to discuss the quandary.

I guess my overall point is that if this strategy really does improve returns over the market, then either position (everyone doing it, or no one doing it) is sub optimal.  It should reach an equilibrium.  That punchline is just a variation which i've heard before, but doesn't really make sense for the time frame.   It's funny in that the economist is quibbling about the EMH, while the trend follower is busy snatching up the $20, but you stretch that quibbling time frame out to several decades long and suddenly the joke no longer makes any sense.  Why would the economist still be quibbling 20 or 30 years later while he was watching trend followers continually snatch up those $20 bills during that whole time frame?  Either there is no $20 to snatch up, it's cost prohibitive to snatch it up, or the collective economist has been standing at the front of a free buffet line all this time and never bothered to take a bite.

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Re: Dual Momentum Investing
« Reply #71 on: April 17, 2015, 09:59:31 AM »
I was responding to a specific question: if it's such a great approach, why isn't everyone doing it, and why are there no dual momentum mutual funds?

The point that I was making is that if everyone theoretically adopted such a strategy, it would still be difficult to arbitrage away  it's strengths because of the unique properties of momentum (its paradoxical positive feedback loop to crowding.)

I don't see how this answers the question.

The question wasn't "What if everyone did it?" (which is what you answered), it's "if it's such a great approach, why isn't everyone doing it, and why are there no dual momentum mutual funds?"
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Re: Dual Momentum Investing
« Reply #72 on: April 17, 2015, 10:16:21 AM »
I was responding to a specific question: if it's such a great approach, why isn't everyone doing it, and why are there no dual momentum mutual funds?

The point that I was making is that if everyone theoretically adopted such a strategy, it would still be difficult to arbitrage away  it's strengths because of the unique properties of momentum (its paradoxical positive feedback loop to crowding.)

I don't see how this answers the question.

The question wasn't "What if everyone did it?" (which is what you answered), it's "if it's such a great approach, why isn't everyone doing it, and why are there no dual momentum mutual funds?"

Here are a few whys I can think of even though I am not very familiar with this approach.

1: it might have some hidden holes that MD has not discovered yet
2: It is a sound strategy that it is not easy to implement or follow

You can give 1 working indicator and show 2 investors how to use it.  After a year, you would see totally different results. The more money involved, the more divergence between the results of these 2 investors is.


One way to know after you have left no stones un-turned trying to break it is to test it with a small portfolio and scale up as your confidence swells.....




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Re: Dual Momentum Investing
« Reply #73 on: April 17, 2015, 10:27:33 AM »
I was responding to a specific question: if it's such a great approach, why isn't everyone doing it, and why are there no dual momentum mutual funds?

The point that I was making is that if everyone theoretically adopted such a strategy, it would still be difficult to arbitrage away  it's strengths because of the unique properties of momentum (its paradoxical positive feedback loop to crowding.)

I don't see how this answers the question.

The question wasn't "What if everyone did it?" (which is what you answered), it's "if it's such a great approach, why isn't everyone doing it, and why are there no dual momentum mutual funds?"

Here are a few whys I can think of even though I am not very familiar with this approach.

1: it might have some hidden holes that MD has not discovered yet
2: It is a sound strategy that it is not easy to implement or follow

1 is what we're worried about.  2 is not the case, they claim it is easy to implement/follow.  And the easiness isn't relevant to a fund doing it, they should be able to manage even if it's difficult.
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frugalnacho

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Re: Dual Momentum Investing
« Reply #74 on: April 17, 2015, 10:47:23 AM »
1 is what we're worried about.  2 is not the case, they claim it is easy to implement/follow.  And the easiness isn't relevant to a fund doing it, they should be able to manage even if it's difficult.

Ditto.

And to respond to hodedofome's explanation of the funds expenses "ridiculously high (2% management + 20% performance)"...

Why doesn't someone else create a fund and only charge 15% of performance?

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« Reply #75 on: April 17, 2015, 11:21:32 AM »
I was responding to a specific question: if it's such a great approach, why isn't everyone doing it, and why are there no dual momentum mutual funds?

The point that I was making is that if everyone theoretically adopted such a strategy, it would still be difficult to arbitrage away  it's strengths because of the unique properties of momentum (its paradoxical positive feedback loop to crowding.)

I don't see how this answers the question.

The question wasn't "What if everyone did it?" (which is what you answered), it's "if it's such a great approach, why isn't everyone doing it, and why are there no dual momentum mutual funds?"

Right.

This is getting very derivative.

The question that you are asking about ETFs is what I originally answered in post # 71 .  Ie impact costs and the difficulty in marketing a fund that has one s & p fund in it for years at a time.

The quote above is a response to an out of context response to that response!
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Re: Dual Momentum Investing
« Reply #76 on: April 17, 2015, 11:26:14 AM »
the difficulty in marketing a fund that has one s & p fund in it for years at a time.

They do it with target date funds, that has a few basic funds, just rebalances, and slowly shifts the allocation over the years.

Why wouldn't a dual momentum fund be similar?
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Re: Dual Momentum Investing
« Reply #77 on: April 17, 2015, 11:26:21 AM »
One final point. If vanguard gave up on the whole cap weighted index thing and decided to launch a dual momentum fund and it had significant capital invested in it, it would not take long for observers to figure out their Lookback period and front run the fund (ie buy the asset class a day early and sell it a day early, driving up the funds costs and diminishing their gains...
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Re: Dual Momentum Investing
« Reply #78 on: April 17, 2015, 11:30:27 AM »

the difficulty in marketing a fund that has one s & p fund in it for years at a time.

They do it with target date funds, that has a few basic funds, just rebalances, and slowly shifts the allocation over the years.

Why wouldn't a dual momentum fund be similar?

Target date funds are funds of funds, and are simply passive allocations periodically rebalanced and risk adjusted. Totally different from an active fund that holds one index fund at a time and trades as often as monthly with wild swings in risk profiles from 100% long equities to 100% cash.

And target dates never hold only one index fundas their sole holding.
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Re: Dual Momentum Investing
« Reply #79 on: April 17, 2015, 11:31:45 AM »
One final point. If vanguard gave up on the whole cap weighted index thing and decided to launch a dual momentum fund and it had significant capital invested in it, it would not take long for observers to figure out their Lookback period and front run the fund (ie buy the asset class a day early and sell it a day early, driving up the funds costs and diminishing their gains...

So this would analogous to vanguard seeing a bunch of $20 bills on the ground, and then deciding not to pick them up because other people will notice them picking it, and will pick it up for themselves, and eventually there will be no more bills on the ground, so why bother in the first place?

frugalnacho

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Re: Dual Momentum Investing
« Reply #80 on: April 17, 2015, 11:39:10 AM »

the difficulty in marketing a fund that has one s & p fund in it for years at a time.

They do it with target date funds, that has a few basic funds, just rebalances, and slowly shifts the allocation over the years.

Why wouldn't a dual momentum fund be similar?

Target date funds are funds of funds, and are simply passive allocations periodically rebalanced and risk adjusted. Totally different from an active fund that holds one index fund at a time and trades as often as monthly with wild swings in risk profiles from 100% long equities to 100% cash.

And target dates never hold only one index fundas their sole holding.

I don't understand how that negates his points.  If it's a simple algorithm to buy a set asset allocation at a set point in time (for a target date fund), I don't understand why they couldn't just change the algorithm to buy a set asset allocation based on a rolling 6 month average.  I understand you will incur more trading costs, and have more market impact costs, but it seems that if the excess return is as great as you've stated then surely there is enough wiggle room to absorb some amount of market impact costs before it's no longer profitable. 

arebelspy

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Re: Dual Momentum Investing
« Reply #81 on: April 17, 2015, 11:45:00 AM »

the difficulty in marketing a fund that has one s & p fund in it for years at a time.

They do it with target date funds, that has a few basic funds, just rebalances, and slowly shifts the allocation over the years.

Why wouldn't a dual momentum fund be similar?

Target date funds are funds of funds, and are simply passive allocations periodically rebalanced and risk adjusted. Totally different from an active fund that holds one index fund at a time and trades as often as monthly with wild swings in risk profiles from 100% long equities to 100% cash.

And target dates never hold only one index fundas their sole holding.

You're missing my point--it's not to nitpick on the differences between DM and TD funds, but to point out that target date funds are relatively simple.  It picks a certain AA, has just a few index funds, and then rebalances and shifts the AA gradually.

Pretty much anyone can do them.  Yet they are marketed and exist anyways, and people buy them anyways.

If your main argument for why there is no DM fund is "it'd be hard to sell something so simple," I don't buy it, because of the target date fund analogy.  They're both simple, yet the one exists and the other doesn't.  Why not?

People will pay for others to do their work, including looking at the past and investing based on that.  So why doesn't it exist?
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Re: Dual Momentum Investing
« Reply #82 on: April 17, 2015, 12:04:09 PM »
Did anyone read my post? GMOM is a new fund that does dual momentum. For the past 40 years they were known as Managed Futures. There are managed futures mutual funds but they generally suck.

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Re: Dual Momentum Investing
« Reply #83 on: April 17, 2015, 12:05:20 PM »
I read it, and was wondering how everyone else seemed to be overlooking it.
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Re: Dual Momentum Investing
« Reply #84 on: April 17, 2015, 12:07:46 PM »
Did anyone read my post? GMOM is a new fund that does dual momentum. For the past 40 years they were known as Managed Futures. There are managed futures mutual funds but they generally suck.

I did.  I can't view any of those pages without registering for an account, so I can't navigate through them, but I did have a follow up question:

And to respond to hodedofome's explanation of the funds expenses "ridiculously high (2% management + 20% performance)"...

Why doesn't someone else create a fund and only charge 15% of performance?

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Re: Dual Momentum Investing
« Reply #85 on: April 17, 2015, 12:13:36 PM »
So the past 20 or so posts were because everyone is too lazy to register for a free account?

In response to the fees question, there are some funds that charge lower fees. But these are businesses we're talking about here. Some websites charge more for computer parts than Newegg but that hasn't put them out of business. Some funds perform better than others so they charge more. Some funds just like to help out their investors so they charge less. There's a floor to the fees however, because hedge funds are very expensive to run. Very high regulatory costs.

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Re: Dual Momentum Investing
« Reply #86 on: April 17, 2015, 12:25:40 PM »
So the past 20 or so posts were because everyone is too lazy to register for a free account?

In response to the fees question, there are some funds that charge lower fees. But these are businesses we're talking about here. Some websites charge more for computer parts than Newegg but that hasn't put them out of business. Some funds perform better than others so they charge more. Some funds just like to help out their investors so they charge less. There's a floor to the fees however, because hedge funds are very expensive to run. Very high regulatory costs.

That and it requires an email address and phone number.  I don't trust them.

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Re: Dual Momentum Investing
« Reply #87 on: April 17, 2015, 12:34:06 PM »
I've used a momentum investing strategy for the last 15 years and have had great results.  I just recently switched to a form of dual momentum strategy with half of my portfolio about a year ago and agree with milesdividend that it appears likely that it will increase returns and decrease risk by limiting the downside during bear markets.

As for the questions about why everyone isn't using it...there are thousands of investing strategies out there that people are touting.  Some of them work, some don't.  It takes work and research to investigate the strategies and see if they work that most people aren't willing to do.  And just because it hasn't become popular sure doesn't mean it can't be a successful strategy.

Just because you haven't heard of a strategy or aren't aware of mutual funds that use the strategy, that doesn't mean they don't exist or it isn't a potential winning strategy.  As with most investing strategies, if you can stay the course during the bad times then I think it is very likely this will be a profitable strategy.

Just wanted to provide a viewpoint from someone who has some more extensive experience with this, at least the momentum portion of it.

milesdividendmd

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Re: Dual Momentum Investing
« Reply #88 on: April 17, 2015, 12:37:08 PM »


the difficulty in marketing a fund that has one s & p fund in it for years at a time.

They do it with target date funds, that has a few basic funds, just rebalances, and slowly shifts the allocation over the years.

Why wouldn't a dual momentum fund be similar?

Target date funds are funds of funds, and are simply passive allocations periodically rebalanced and risk adjusted. Totally different from an active fund that holds one index fund at a time and trades as often as monthly with wild swings in risk profiles from 100% long equities to 100% cash.

And target dates never hold only one index fundas their sole holding.

I don't understand how that negates his points.  If it's a simple algorithm to buy a set asset allocation at a set point in time (for a target date fund), I don't understand why they couldn't just change the algorithm to buy a set asset allocation based on a rolling 6 month average.  I understand you will incur more trading costs, and have more market impact costs, but it seems that if the excess return is as great as you've stated then surely there is enough wiggle room to absorb some amount of market impact costs before it's no longer profitable.

No matter their lookback period, with a large enough fund it would be easily figured out with SEC filings alone. Their outperformance would be arbitraged away.
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milesdividendmd

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Re: Dual Momentum Investing
« Reply #89 on: April 17, 2015, 12:37:59 PM »

I've used a momentum investing strategy for the last 15 years and have had great results.  I just recently switched to a form of dual momentum strategy with half of my portfolio about a year ago and agree with milesdividend that it appears likely that it will increase returns and decrease risk by limiting the downside during bear markets.

As for the questions about why everyone isn't using it...there are thousands of investing strategies out there that people are touting.  Some of them work, some don't.  It takes work and research to investigate the strategies and see if they work that most people aren't willing to do.  And just because it hasn't become popular sure doesn't mean it can't be a successful strategy.

Just because you haven't heard of a strategy or aren't aware of mutual funds that use the strategy, that doesn't mean they don't exist or it isn't a potential winning strategy.  As with most investing strategies, if you can stay the course during the bad times then I think it is very likely this will be a profitable strategy.

Just wanted to provide a viewpoint from someone who has some more extensive experience with this, at least the momentum portion of it.

Well stated.
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milesdividendmd

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« Reply #90 on: April 17, 2015, 06:17:20 PM »

the difficulty in marketing a fund that has one s & p fund in it for years at a time.

They do it with target date funds, that has a few basic funds, just rebalances, and slowly shifts the allocation over the years.

Why wouldn't a dual momentum fund be similar?

Target date funds are funds of funds, and are simply passive allocations periodically rebalanced and risk adjusted. Totally different from an active fund that holds one index fund at a time and trades as often as monthly with wild swings in risk profiles from 100% long equities to 100% cash.

And target dates never hold only one index fundas their sole holding.

You're missing my point--it's not to nitpick on the differences between DM and TD funds, but to point out that target date funds are relatively simple.  It picks a certain AA, has just a few index funds, and then rebalances and shifts the AA gradually.

Pretty much anyone can do them.  Yet they are marketed and exist anyways, and people buy them anyways.

If your main argument for why there is no DM fund is "it'd be hard to sell something so simple," I don't buy it, because of the target date fund analogy.  They're both simple, yet the one exists and the other doesn't.  Why not?

People will pay for others to do their work, including looking at the past and investing based on that.  So why doesn't it exist?

As hodedofome points out above there are (new) funds that utilize dual momentum methodology and managed futures funds have been around for a long time. But these are not really close to the simple global equities momentum that I use.

This marketing question was far from my main point, it was a small point.  But I just find it very hard to imagine trying to sell people on an active fund that at any one time will contain nothing more then a single S&P 500 fund, or an EAFE fund or a total bond fund.

Vanguard is selling convenience (in addition to their underlying funds) with TD funds. But selling an active fund is selling something else entirely which is the perception of outperformance. Equating one to the other is a conceptual error in my view.

The bigger hurdles however, are the fact that if you ran such a fund Then changing your position for 100% of your multi-hundred million dollar portfolio 1 to 2 times per year would have major impact costs and inflate the expense ratio far more than rebalancing a cap weighted 3fund portfolio  , and the problem of frontrunning as described above.
« Last Edit: April 17, 2015, 07:02:17 PM by milesdividendmd »
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Re: Dual Momentum Investing
« Reply #91 on: April 17, 2015, 07:34:03 PM »
Reading Antonacci's book from library now.

Following thread to go back and look at some of the links.  Thanks, everyone.

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Re: Dual Momentum Investing
« Reply #92 on: April 17, 2015, 08:33:35 PM »

I just read up a little about it now.  Color me suspicious, especially since it's partially sold by the backtesting.  Of course it backtests well!  It grew out of the backtests themselves, if it didn't fit them, he would have changed the algorithm.  This seems like survivorship bias to me.  (That doesn't mean it won't continue to work for a while longer, of course.)

I also can't find anything about a monte carlo simulation, which would be much better than backtesting.

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Re: Dual Momentum Investing
« Reply #93 on: April 17, 2015, 08:38:11 PM »


I just read up a little about it now.  Color me suspicious, especially since it's partially sold by the backtesting.  Of course it backtests well!  It grew out of the backtests themselves, if it didn't fit them, he would have changed the algorithm.  This seems like survivorship bias to me.  (That doesn't mean it won't continue to work for a while longer, of course.)

I also can't find anything about a monte carlo simulation, which would be much better than backtesting.

Please justify your use of the term survivorship bias.
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frugalnacho

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Re: Dual Momentum Investing
« Reply #94 on: April 17, 2015, 08:40:05 PM »

I just read up a little about it now.  Color me suspicious, especially since it's partially sold by the backtesting.  Of course it backtests well!  It grew out of the backtests themselves, if it didn't fit them, he would have changed the algorithm.  This seems like survivorship bias to me.  (That doesn't mean it won't continue to work for a while longer, of course.)

I also can't find anything about a monte carlo simulation, which would be much better than backtesting.

How could you perform a monte carlo? Don't you lose the whole momentum thing (which is critical to the strategy) by randomizing it like that?

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Re: Dual Momentum Investing
« Reply #95 on: April 17, 2015, 10:29:07 PM »
The problem, really, is that there are an infinite number of possible algorithms that could be used to try to implement any sort of strategy you want. You could take the stock market results, or you could take just a big batch of random numbers, and a BUNCH of those "strategies" would look great in backtesting.

It really comes down to whether or not you believe the stock market to be a random (though upwards in general) walk or not. Whether there are irrational people and panics or not, or whether the market is efficient isn't relevant, since you can't predict when these events will happen or how long they will last - unless of course you think that in fact they are in some way predictable (either their timing, duration, whatever).

There is really no middle ground here, so there's probably no reason to bother arguing about it. Psychology tells us that we have an inherent bias toward seeing patterns where there are none, and extra trading = extra costs and taxes. So you need to believe *really* strongly in what you're doing to do what Miles is doing. If so, more power to you. I hope you do great.

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« Reply #96 on: April 17, 2015, 11:40:17 PM »
The problem, really, is that there are an infinite number of possible algorithms that could be used to try to implement any sort of strategy you want. You could take the stock market results, or you could take just a big batch of random numbers, and a BUNCH of those "strategies" would look great in backtesting.

It really comes down to whether or not you believe the stock market to be a random (though upwards in general) walk or not. Whether there are irrational people and panics or not, or whether the market is efficient isn't relevant, since you can't predict when these events will happen or how long they will last - unless of course you think that in fact they are in some way predictable (either their timing, duration, whatever).

There is really no middle ground here, so there's probably no reason to bother arguing about it. Psychology tells us that we have an inherent bias toward seeing patterns where there are none, and extra trading = extra costs and taxes. So you need to believe *really* strongly in what you're doing to do what Miles is doing. If so, more power to you. I hope you do great.

-W

There is a lot of truth in this.

Every approach (even indexing) is merely a bet on the future based on past results.

That being said all theories are not created equal. And there are ways of testing hypotheses that help to screen out curve fitting (out of sample testing, etc).

At the end of the day one chooses the approach that he believes gives him the best chance of sticking to the plan through thick and thin.

Here then are my core beliefs which may or may not be true, that have informed my personal decision to adopt this strategy.

1.  Costs matter a lot.
2.  It is possible to decrease drawdowns with trend following (ie. Moving averages, or absolute momentum,) with rare exceptions (ie flash crashes).
3.  Trading should be infrequent because it is expensive.
4.  Price Momentum exists and will continue to exist as long as humans are involved in markets.
5.  Investment Theories should always be simple.
6.  Avoiding the loss of capital is much more powerful than increasing returns on capital.
( http://www.milesdividendmd.com/on-the-wisdom-of-cowardice/)

There is a lot to argue with in there, and the arguments may even be interesting!
« Last Edit: April 17, 2015, 11:54:33 PM by milesdividendmd »
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waltworks

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Re: Dual Momentum Investing
« Reply #97 on: April 18, 2015, 12:26:42 AM »
Yep, either you believe there's an underlying pattern, or you don't. You do. I don't, other than a general belief that the past general positive trend will continue in the long term.

I also will echo Arebelspy here - if this strategy were usable, it would be widely used. Very widely used, presumably particularly by hedge funds, whose originally raison d'etre was to mitigate losses during downturns (a task, I might note, that all the literature says they have abjectly failed at). Anything implementable by an individual investor now has arguably been implementable for 100+ years, and these days legions of *brilliant* people with more processing power than I can imagine work on these things. There's no one weird trick out there.

Except acai berries. Those things are amazing.

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Re: Dual Momentum Investing
« Reply #98 on: April 18, 2015, 12:57:09 AM »
There are thousands of things that we as individuals don't believe in and a only a few that we do.

What is more interesting than saying what you don't believe in generally,  I believe, is saying what you do or don't believe in specifically.

From your comment I can only surmise that you don't believe in the possibility of a simple active strategy working, despite the fact that some demonstrably have in the past and in a non random manner.

It is curious that momentum, described in its modern form in 1993 has persisted unabated in in and out of sample markets since.
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Re: Dual Momentum Investing
« Reply #99 on: April 18, 2015, 07:44:52 AM »
In the literature I read, it seems that a 12 month lookback period supposedly give better results than a six month period. Miles, how did you settle on 6 months?

The optimal time period for a Lookback  is an unresolved  question.

What is clear is that the longer The Lookback period, the less trades you will make (Which is a very good thing.)

What is also clear is that with dual momentum you will exit risky assets when they have underperformed T-bills for your Lookback period.  this means that A longer Lookback period will mean that you will stay in the bear market a little bit longer, and get back into the recovery in little bit later.

From a behavioral standpoint, I felt that limiting drawdowns was attractive for me personally.

The look back should be between three and 12 months,  or a combination of multiple time periods in that range.

The lookback period is the heart of the model; it is the main variable that is used to optimize performance.  Too long, you get creamed; too short, you get whipsawed.  It is also the variable that is most vulnerable to over-fitting (i.e., constructing a model that predicts the past instead of the future).  Many posts have already alluded to the number one rule of modeling anything: construct your model using one set of data and validate it using another set of data.  So, the logical thing to do would be to divide the historical market data into two sets.  Use, say, 1900 - 1960 to optimize the lookback period, then use 1961 - present to test the model's performance.  Surely Antonacci (or someone) has already done this?  I'm too lazy to read all the background material - I'm hoping one of you already has and can enlighten me.
"Take this job and shove it" - David Allan Coe