Author Topic: Dual Momentum Investing  (Read 215619 times)

milesdividendmd

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Re: Dual Momentum Investing
« Reply #650 on: August 19, 2015, 12:42:41 PM »
Stock charts calculates total returns.
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starguru

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Re: Dual Momentum Investing
« Reply #651 on: August 19, 2015, 12:51:56 PM »
Stock charts calculates total returns.

Doesn't help when Im trying to figure out my own, unless they have a publicly accessible API.

Would total performance be

(CP2 + DP - CP1)/CP1

where

CP2 is the closing price at the end of the interval
CP1 is the closing price at the start of the interval
DP is all the dividend payments distributed during the interval?

so if a stock has a closing price of 100 at the start of the interval, and then closes at 105 at the end of the interval, and then distributed $4 in dividends during the interval,

(105 + 4 - 100)/100 = 9%?


milesdividendmd

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Dual Momentum Investing
« Reply #652 on: August 19, 2015, 01:05:46 PM »
(Cp2 + DP -CP1)/CP1
« Last Edit: August 19, 2015, 01:41:34 PM by milesdividendmd »
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starguru

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Re: Dual Momentum Investing
« Reply #653 on: August 20, 2015, 04:09:36 PM »
(Cp2 + DP -CP1)/CP1

Hey if a dataset returns "Adjusted Closing Price" is it true that all i would have to do is my calculations based off that?

https://help.yahoo.com/kb/SLN2311.html

milesdividendmd

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Re: Dual Momentum Investing
« Reply #654 on: August 20, 2015, 06:29:59 PM »
It would seem to fit the bill. Thanks for teaching me a new term.
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starguru

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Re: Dual Momentum Investing
« Reply #655 on: August 21, 2015, 09:04:31 AM »
It would seem to fit the bill. Thanks for teaching me a new term.

I have some fear that they calculate adjusted close on a day where it applies, but don't carry that new value forward.  I don't know how to prove or disprove that.

milesdividendmd

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Re: Dual Momentum Investing
« Reply #656 on: August 21, 2015, 09:40:32 AM »
Compare the pure price of the stock to the adjusted closing cost. If the latter only diverges to the upside, you should be fine.
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forummm

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Re: Dual Momentum Investing
« Reply #657 on: August 21, 2015, 09:44:15 AM »
Are you guys getting ready to head to bonds or something with the market taking a slight dip lately?

milesdividendmd

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Re: Dual Momentum Investing
« Reply #658 on: August 21, 2015, 09:58:29 AM »

Are you guys getting ready to head to bonds or something with the market taking a slight dip lately?

We'll calculate at the end of the month and see.

This damned Chrystal ball is cloudy at the moment.
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K-ice

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Re: Dual Momentum Investing
« Reply #659 on: August 22, 2015, 11:37:43 PM »
This link may already be posted but I just found it so I thought I would share (again).

http://awealthofcommonsense.com/my-thoughts-on-gary-antonaccis-dual-momentum/


starguru

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Re: Dual Momentum Investing
« Reply #660 on: August 23, 2015, 01:30:32 PM »

Are you guys getting ready to head to bonds or something with the market taking a slight dip lately?

We'll calculate at the end of the month and see.

This damned Chrystal ball is cloudy at the moment.

Got the date ticks to be last trading day of each month.  US stocks lost were still superior to cash Wednesday, but fell way below the last two days.  Although this is with the understanding the algorithm only calls for checking at the end of the month.

Why not check every two weeks?


milesdividendmd

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Re: Dual Momentum Investing
« Reply #661 on: August 23, 2015, 01:53:45 PM »
Too much checking would lead to too much noise which would lead to to much unnecessary trading/costs.

The timeframe of momentum is on the order of months, so no need to check weekly.
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milesdividendmd

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Re: Dual Momentum Investing
« Reply #662 on: August 23, 2015, 03:49:13 PM »
No reason not to model it, though. Just make sure to account for trading costs.
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sirdoug007

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Re: Dual Momentum Investing
« Reply #663 on: August 23, 2015, 07:47:41 PM »
Are you guys getting ready to head to bonds or something with the market taking a slight dip lately?

I set up a reminder to check the momentum charts on the third Friday of every month several months ago.

I just checked and the signal is to move to cash. 

This is the chart I use: http://stockcharts.com/freecharts/perf.php?VTI,EFA,BND,VNQ&n=125&O=011000

milesdividendmd

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Re: Dual Momentum Investing
« Reply #664 on: August 23, 2015, 07:59:04 PM »
Make the move!
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starguru

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Re: Dual Momentum Investing
« Reply #665 on: August 23, 2015, 08:13:14 PM »
Are you guys getting ready to head to bonds or something with the market taking a slight dip lately?

I set up a reminder to check the momentum charts on the third Friday of every month several months ago.

I just checked and the signal is to move to cash. 

This is the chart I use: http://stockcharts.com/freecharts/perf.php?VTI,EFA,BND,VNQ&n=125&O=011000

Confused about what these charts are showing.  Are they showing performance on a 6 month look-back?

sirdoug007

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Re: Dual Momentum Investing
« Reply #666 on: August 23, 2015, 08:22:05 PM »
Are you guys getting ready to head to bonds or something with the market taking a slight dip lately?

I set up a reminder to check the momentum charts on the third Friday of every month several months ago.

I just checked and the signal is to move to cash. 

This is the chart I use: http://stockcharts.com/freecharts/perf.php?VTI,EFA,BND,VNQ&n=125&O=011000

Confused about what these charts are showing.  Are they showing performance on a 6 month look-back?

It's looking back 125 trading days, which is pretty close to 6 months.  There are 252 trading days per year.

The first day shown is February 25, 2015.  Last day is August 21, 2015.
« Last Edit: August 23, 2015, 08:25:23 PM by sirdoug007 »

sirdoug007

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Re: Dual Momentum Investing
« Reply #667 on: August 23, 2015, 08:24:00 PM »
Make the move!

The order is in.  This could be a bit gut wrenching but I believe this is a good, well researched strategy.  Especially as what we are talking about is absolute momentum here.

sirdoug007

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Re: Dual Momentum Investing
« Reply #668 on: August 23, 2015, 08:37:25 PM »
Just looking back at 6 month periods and the last time everything all the major equity categories were negative was August 2011.

The last time everything was negative like this (including bonds) was Fall 2008.  Yikes!

milesdividendmd

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Re: Dual Momentum Investing
« Reply #669 on: August 23, 2015, 09:27:35 PM »

Just looking back at 6 month periods and the last time everything all the major equity categories were negative was August 2011.

The last time everything was negative like this (including bonds) was Fall 2008.  Yikes!


It's not so surprising. The market has been sideways since January.

Even a minor move down (like -6% last week)  will move the total returns negative relative to Tbills.

The market could just as easily bounce this week and give domestic or foreign stocks a positive absolute return for the last 6 months by the end of the month.

It seems a bit voodoo, I will concede . After all you can exit too soon or or too late depending on nothing more than your randomly selected trade date.

And now the shit might be hitting the fan (or it might not).  But the fact is that getting out of most significant bear markets early and missing out on a month here or there of positive returns is a good trade.
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Crushtheturtle

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Re: Dual Momentum Investing
« Reply #670 on: August 23, 2015, 11:51:17 PM »
^^
I follow a DM allocation strategy very similar to that laid out in your blog.

Not a good time to be concentrated in Foreign Developed, it seems. And my "trade date" isn't until the 2nd week of the month. I know I shouldn't be paying attention- something I'm still working on. But I have to stay the course.

Hold me, I'm scared :)

milesdividendmd

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Re: Dual Momentum Investing
« Reply #671 on: August 24, 2015, 12:02:04 AM »
Foreign developed outperformed the S&P last week. Not much difference between the 2 recently other than higher dividends in foreign.

I hope that the market recovers before your (and my) trade dates so you don't have to trade at all. That's the best case scenario.

Either way, much of our downside is protected, which is a nice feeling.

Stick to the plan. That's the key.
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milesdividendmd

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Dual Momentum Investing
« Reply #672 on: August 24, 2015, 12:02:09 AM »
Duplicate post
« Last Edit: August 24, 2015, 12:16:37 AM by milesdividendmd »
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K-ice

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Re: Dual Momentum Investing
« Reply #673 on: August 24, 2015, 09:48:43 AM »

I hope that the market recovers before your (and my) trade dates so you don't have to trade at all. That's the best case scenario.

Either way, much of our downside is protected, which is a nice feeling.

Stick to the plan. That's the key.

My trade day is the 5th of the month. So I will just need to hold tight.

Not that easy to do. This might need to become a support group during this crazy stock time.  ;)

ChaseJuggler

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Re: Dual Momentum Investing
« Reply #674 on: August 24, 2015, 10:16:35 AM »
I can't wait to see how this plays out. We've only got 30k in the market so now is the perfect time for a nice long dip to save for the ride back up!

sol

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Re: Dual Momentum Investing
« Reply #675 on: August 25, 2015, 10:42:52 AM »
I'm so eager for updates to this thread I can barely contain myself.  How are all of you DM proponents responding to the market gyrations?  Any asset class transitions yet?

As we've previously discussed, the basic strategy of momentum trading seems to be getting out of bear markets early and getting back in to bull markets early, where "early" is defined by your lookback period to ideally switch asset classes after some small change but before the expected subsequent larger change.  I'm keen to see how the strategy holds up under conditions like this, where the market is flat for a long time (no signal) then suddenly drops a bunch (signal?) and then maybe starts to climb back up again. 

In essence, getting that sell signal from your DM strategy means you are betting that markets will continue to drop, and will drop by more than they rise again before you get the signal to buy back in.  I don't think I would have the stomach for that sort of market timing.  If I just sit in the market, I'm guaranteed to do average.  If I started trading in and out, I think I would feel queasy about the possibility of deliberately exposing myself to catastrophic losses.

milesdividendmd

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Re: Dual Momentum Investing
« Reply #676 on: August 25, 2015, 01:03:08 PM »

I'm so eager for updates to this thread I can barely contain myself.  How are all of you DM proponents responding to the market gyrations?  Any asset class transitions yet?

As we've previously discussed, the basic strategy of momentum trading seems to be getting out of bear markets early and getting back in to bull markets early, where "early" is defined by your lookback period to ideally switch asset classes after some small change but before the expected subsequent larger change.  I'm keen to see how the strategy holds up under conditions like this, where the market is flat for a long time (no signal) then suddenly drops a bunch (signal?) and then maybe starts to climb back up again. 

In essence, getting that sell signal from your DM strategy means you are betting that markets will continue to drop, and will drop by more than they rise again before you get the signal to buy back in.  I don't think I would have the stomach for that sort of market timing.  If I just sit in the market, I'm guaranteed to do average.  If I started trading in and out, I think I would feel queasy about the possibility of deliberately exposing myself to catastrophic losses.

Glad you are interested Sol.

My intuition is that the economy is OK and that this correction will be short lived.

That being said, whatever the signal is at month's end I will execute it since I respect the strategy more than my intuition.

This article nicely captures this tension between sticking to the plan and trusting your own intuition.

http://www.sharpereturns.ca/2015/07/never-override-your-system.html?m=1

The bargain with DM is that you agree to sit out some good months in order to avoid the large majority of bear market drawdowns.

It's a great bargain in my book but it's not for everyone.

If that uncertainty is not comfortable to you and you can't stomach tracking error, then DM would never work for you.

To each his/her own.
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sirdoug007

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Re: Dual Momentum Investing
« Reply #677 on: August 25, 2015, 01:42:08 PM »
It'll be interesting to see where this market goes over the next 6 months. The last 6 months have been flat until now.

This afternoon it looks like the proverbial dead cat has bounced and is headed lower...


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Re: Dual Momentum Investing
« Reply #678 on: August 25, 2015, 02:36:29 PM »
I gotta say, i don't think i'd have the stomach for this strategy, so props I guess to those who do.  I'm pretty content to just continue to auto invest into my set asset allocation and ignore pretty much everything else.  Can't imagine if say, today was the end of my 6 month lookback period and the strategy dictated that I move everything to cash.  Really? I've lost five figures and now i'm going to sell?  Then watch as the market possibly rebounds. Yikes. 

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Re: Dual Momentum Investing
« Reply #679 on: August 25, 2015, 04:42:07 PM »
I gotta say, i don't think i'd have the stomach for this strategy, so props I guess to those who do.  I'm pretty content to just continue to auto invest into my set asset allocation and ignore pretty much everything else.  Can't imagine if say, today was the end of my 6 month lookback period and the strategy dictated that I move everything to cash.  Really? I've lost five figures and now i'm going to sell?  Then watch as the market possibly rebounds. Yikes. 

And the market will keep going up and down every day. You'll think about how much you missed out on when it moves. I think it's a hard strategy to hold to. Especially since it lags buy-and-hold in about half of the past 14 decades. I can even hear Miles questioning whether this is really a market that will continue on its way down after he sells next week. If I were being a market timer, I would also guess that the market isn't about to drop another 10% (although I hope it does the next couple days before I get paid).

K-ice

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Re: Dual Momentum Investing
« Reply #680 on: August 25, 2015, 05:15:24 PM »
So unless you are a day trader (which this isn't) it is best to wait until your monthly rebalance date. 

The ups and downs of the past few days havenít really bothered me.

However, if today was my day then my only issue is that depending on my look back time my result is different.  For 1y I do nothing for 6 months I switch to bonds.

I have never had that scenario before.  I am leaning towards a 6 month look back and hope I donít have to make the call in 2 weeks when it is my day.

milesdividendmd

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Re: Dual Momentum Investing
« Reply #681 on: August 25, 2015, 05:23:36 PM »

So unless you are a day trader (which this isn't) it is best to wait until your monthly rebalance date. 

The ups and downs of the past few days havenít really bothered me.

However, if today was my day then my only issue is that depending on my look back time my result is different.  For 1y I do nothing for 6 months I switch to bonds.

I have never had that scenario before.  I am leaning towards a 6 month look back and hope I donít have to make the call in 2 weeks when it is my day.

You should really know your look back methodology before you know your trading day!

It doesn't matter too much long term as long as you stick to your plan.

That being said,

The best evidence is for a 12 month look back.

If you want to diversify against whipsaw risk, splitting your portfolio into buckets with different look back periods would seem to make sense.

I personally use 6 months, for no great reason. (I thought it would be behaviorally easier for me to get out sooner rather than later at the cost of increased trading.

AZ



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peterpatch

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Re: Dual Momentum Investing
« Reply #682 on: August 25, 2015, 06:13:49 PM »
As we've previously discussed, the basic strategy of momentum trading seems to be getting out of bear markets early and getting back in to bull markets early, where "early" is defined by your lookback period to ideally switch asset classes after some small change but before the expected subsequent larger change.

That's a good description for the absolute momentum component of the dual momentum strategy because it's trying to get out of bear markets early enough to miss most of the losses and get back into bull markets early enough to reap most of the gains. The other half of the strategy involves being the in the asset that has had the strongest past (3-12 month look back) total returns which is referred to as relative momentum. Relative momentum is , historically, just as volatile if notmore volatile then buy and hold.

  If I started trading in and out, I think I would feel queasy about the possibility of deliberately exposing myself to catastrophic losses.

That's like asking the fireman to turn the hose off while you're burning in a fire because you don't want to risk drowning. Although drowning would be a risk, dying from the fire is a much higher risk. The absolute momentum component of the strategy should, at least, have a very good chance of having lower drawdowns and volatility vs a pure buy and hold strategy. However I think there's a slightly higher probability that the returns of dual momentum could be lower long term compared to buy and hold.

I guess if you're comfortable with buy and hold and that's your strategy than you should stick to the strategy like a stamp. It's probably more important to feel comfortable enough with a  decent strategy than it is to choose the most empirically and theoretically sound strategy you can find but not be able to stomach it.

« Last Edit: August 25, 2015, 06:16:33 PM by peterpatch »

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Re: Dual Momentum Investing
« Reply #683 on: August 25, 2015, 07:36:59 PM »
It's precisely because it's so hard to do that it works (or has worked in the past, at least - that uncertainty about whether a past strategy will continue to work in the future is also, by itself, a reason that it will keep on working).
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Re: Dual Momentum Investing
« Reply #684 on: August 25, 2015, 08:04:38 PM »
I guess if you're comfortable with buy and hold and that's your strategy than you should stick to the strategy like a stamp. It's probably more important to feel comfortable enough with a  decent strategy than it is to choose the most empirically and theoretically sound strategy you can find but not be able to stomach it.

At the risk of re-re-opening the same can of worms that has already been opened and sealed more than once over the course of this thread, I believe this is the first time someone has argued that DM has a superior theoretical underpinning in comparison to buy and hold indexing.  Much of the discussion has centered around whether any theoretical basis exists to support a specific-lookback-period-dependent DM strategy, but thus far no one has argued it is the more theoretically sound strategy.  The theoretical basis behind buy and hold indexing (i.e., mathematical certainty to match the market's performance minus costs) is clear and unassailable, but, while theoretical reasons have been offered to explain the existence of momentum in markets and why the specific lookback period or range of lookback periods that worked in the past will continue to work in the future, they certainly don't carry the guarantee that comes with the laws of arithmetic.

sol

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Re: Dual Momentum Investing
« Reply #685 on: August 25, 2015, 08:14:12 PM »
I think you've bolded the wrong part, brooklyn.  I suspect he meant to emphasize "empirically sound" over theoretically sound, and was slightly wishy washy on what constitutes "sound"

If he primarily values reduced volatility over total long term returns, and tacitly accepts the data mining approach implicit in an empirical analysis of historical returns, then DM looks more "sound" even in the complete absence of any theoretical underpinning.  As we've already discussed, they don't care why it works as long as the data suggests that it has worked in the past.

milesdividendmd

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Dual Momentum Investing
« Reply #686 on: August 25, 2015, 09:05:22 PM »
I think you've bolded the wrong part, brooklyn.  I suspect he meant to emphasize "empirically sound" over theoretically sound, and was slightly wishy washy on what constitutes "sound"

If he primarily values reduced volatility over total long term returns, and tacitly accepts the data mining approach implicit in an empirical analysis of historical returns, then DM looks more "sound" even in the complete absence of any theoretical underpinning.  As we've already discussed, they don't care why it works as long as the data suggests that it has worked in the past.

This is too smug by quite a bit. I would guess that the reason why you continue to pop up in this thread despite your prior promised absence, Sol, is that you have doubts about your own conclusions. (Not so unusual or unhealthy a sentiment at all.)

As previously discussed the only reason that buy and hold indexing is so damned popular around here (and deservedly so IMO)  has little to do with its theoretical underpinnings and everything to do with its statistically significant outperformance over everything else over the last 45 years.

(This is also why Buffet is so admired.)

For a more fleshed out argument for those statements see here (again): 

http://www.milesdividendmd.com/bedtime-stories/

Buy and holders are performance chasers too, but they are smart ones because they pay attention to reality. Always a good idea in my book. Then they tell themselves pretty stories after the fact about their being "willing to accept the returns of the market."

A better argument for buy and hold is that there is a longer history and more data in support of it. A larger N is always good.

As to the question about whether or not DM will continue to outperform passive indexing into the future: I'm agnostic.

But I'm quite comfortable that it will have smaller drawdowns, and a higher sharpe ratio, and I'm almost sure it will beat my portfolio that I would have owned if I had continued to buy and hold with a 75%/25% portfolio.

Which is why I'm long DM in my tax protected accounts.
« Last Edit: August 25, 2015, 09:10:34 PM by milesdividendmd »
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sol

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Re: Dual Momentum Investing
« Reply #687 on: August 25, 2015, 09:16:11 PM »
This is too smug by quite a bit.

Hah, that's probably an adequate assessment of my entire forum posting history.

As for the rest, I'm not doubting my buy and hold strategy in the slightest.  If anything, these market swings have made me question momentum strategies even more.  It sure looks like market prices are randomly gyrating wildly in both directions, and I think momentum traders are more likely to get burned in that environment than buy and hold investors.  I hope I'm wrong, of course, and we all make heaps of money, but I at least want to keep everyone honest about what they're doing.

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Re: Dual Momentum Investing
« Reply #688 on: August 26, 2015, 07:32:50 AM »
If anything, these market swings have made me question momentum strategies even more.  It sure looks like market prices are randomly gyrating wildly in both directions

I don't know what you're talking about, Sol. Clearly the fundamentals of the 500 largest U.S. based companies dropped dramatically (5%) over the weekend, then improved dramatically (5%) over the course of Monday morning (all the firms made a whole lot of sales of their products that morning?) and then worsened dramatically over the course of Monday afternoon (all the firms had a whole lot of returns from the morning's purchases?) and then the fundamentals significantly improved (2%) again around 3:30 (a huge afternoon productivity boost for the multinational workforce) and then worsened (2%) again around 3:50 (all those lazy workers around the world left early for the day). And then overnight the fundamentals shot way up (3%) (all those workers came back to pull all-nighters) and stayed there until around 3pm when they dramatically worsened (4%) (it turns out all that productivity from the all-nighter was wasted because everyone forgot to save their documents and accidentally kicked the power cords out from the backs of their computers all around the world). It just makes total sense.

Crushtheturtle

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Re: Dual Momentum Investing
« Reply #689 on: August 26, 2015, 08:12:37 AM »
If anything, these market swings have made me question momentum strategies even more.  It sure looks like market prices are randomly gyrating wildly in both directions

I don't know what you're talking about, Sol. Clearly the fundamentals of the 500 largest U.S. based companies dropped dramatically (5%) over the weekend, then improved dramatically (5%) over the course of Monday morning (all the firms made a whole lot of sales of their products that morning?) and then worsened dramatically over the course of Monday afternoon (all the firms had a whole lot of returns from the morning's purchases?) and then the fundamentals significantly improved (2%) again around 3:30 (a huge afternoon productivity boost for the multinational workforce) and then worsened (2%) again around 3:50 (all those lazy workers around the world left early for the day). And then overnight the fundamentals shot way up (3%) (all those workers came back to pull all-nighters) and stayed there until around 3pm when they dramatically worsened (4%) (it turns out all that productivity from the all-nighter was wasted because everyone forgot to save their documents and accidentally kicked the power cords out from the backs of their computers all around the world). It just makes total sense.

Momentum is partly predicated on irrational human behavior and groupthink.

The past few days have only served to strengthen the compelling arguments supporting Dual Momentum.

Efficient and rational markets? Lol
 

thepokercab

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Re: Dual Momentum Investing
« Reply #690 on: August 26, 2015, 09:03:46 AM »
Momentum is partly predicated on irrational human behavior and groupthink.

The past few days have only served to strengthen the compelling arguments supporting Dual Momentum.

Efficient and rational markets? Lol

Could you elaborate on this?  Not trying to be snarky, just curious? 

This strategy just confuses me because while buy and holders are just all pretty much on the same page right now (i.e. don't sell, just keep steady, and hope the market continues to rise in the future) one dual momentum investor can be looking for something completely different from another. 

For instance, the s&p is down like 10%.  Dual Momentum investor A lookback period happened over the last few days and is now ALL in on bonds or cash.  She's seen this as confirmation of her signal to get out of one asset class and into another.  Where as dual momentum investor B is 2 months away from his lookback, and wouldn't you know it, the market goes ahead and rebounds and because of that rebound Investor B stays in stocks, where as investor A is probably feeling more than a bit burned at that moment. 

Or, let's say over the next two months the market drops another 10%.  In that case Investor A is now patting herself on the back because she got out 'early' and got less of the downside than Investor B.

To me this just seems pretty random. One person, by virtue of their lookback period, seems to have timed the market better than another.   

K-ice

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Re: Dual Momentum Investing
« Reply #691 on: August 26, 2015, 09:48:27 AM »
As someone currently debating my look back period I will give my 2 cents.

First I have only seen look backs of 3,6,9 or 12 months. Also 200 days.

So 1 & 2 months would be too short & volatile.

Now picking between 6 vs 12 months. Over the past year, for my assets, it doesn't matter.

With the current volatility it does make a difference.

A 6 month would probably trigger a  trade.

Looking at this paper on page 18 there is not much difference in the long term from the different look back periods.

http://www.optimalmomentum.com/RiskPremiaHarvesting.pdf

I don't find the look back choice any more random than when I am trying to select my bond:stock allocation of 20:80 vs 40:60. Or deciding how often I rebalance said allocation.

As with any asset allocation or strategy, I guess the best advise is to pick one and stick with it so you can sleep at night. 


milesdividendmd

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Re: Dual Momentum Investing
« Reply #692 on: August 26, 2015, 10:21:35 AM »

Momentum is partly predicated on irrational human behavior and groupthink.

The past few days have only served to strengthen the compelling arguments supporting Dual Momentum.

Efficient and rational markets? Lol

Could you elaborate on this?  Not trying to be snarky, just curious? 

This strategy just confuses me because while buy and holders are just all pretty much on the same page right now (i.e. don't sell, just keep steady, and hope the market continues to rise in the future) one dual momentum investor can be looking for something completely different from another. 

For instance, the s&p is down like 10%.  Dual Momentum investor A lookback period happened over the last few days and is now ALL in on bonds or cash.  She's seen this as confirmation of her signal to get out of one asset class and into another.  Where as dual momentum investor B is 2 months away from his lookback, and wouldn't you know it, the market goes ahead and rebounds and because of that rebound Investor B stays in stocks, where as investor A is probably feeling more than a bit burned at that moment. 

Or, let's say over the next two months the market drops another 10%.  In that case Investor A is now patting herself on the back because she got out 'early' and got less of the downside than Investor B.

To me this just seems pretty random. One person, by virtue of their lookback period, seems to have timed the market better than another.   

You seemed confused on the look back period.

No matter what your look back period is, you check your signal once a month. So if your look back period is six months, then once a month you calculate the total returns of the past 6 months. If your look back is 12 months then once a month you check total returns for the prior 12 months.

Hope that clears up your question.
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milesdividendmd

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Re: Dual Momentum Investing
« Reply #693 on: August 26, 2015, 10:30:45 AM »

If anything, these market swings have made me question momentum strategies even more.  It sure looks like market prices are randomly gyrating wildly in both directions

I don't know what you're talking about, Sol. Clearly the fundamentals of the 500 largest U.S. based companies dropped dramatically (5%) over the weekend, then improved dramatically (5%) over the course of Monday morning (all the firms made a whole lot of sales of their products that morning?) and then worsened dramatically over the course of Monday afternoon (all the firms had a whole lot of returns from the morning's purchases?) and then the fundamentals significantly improved (2%) again around 3:30 (a huge afternoon productivity boost for the multinational workforce) and then worsened (2%) again around 3:50 (all those lazy workers around the world left early for the day). And then overnight the fundamentals shot way up (3%) (all those workers came back to pull all-nighters) and stayed there until around 3pm when they dramatically worsened (4%) (it turns out all that productivity from the all-nighter was wasted because everyone forgot to save their documents and accidentally kicked the power cords out from the backs of their computers all around the world). It just makes total sense.

Momentum is partly predicated on irrational human behavior and groupthink.

The past few days have only served to strengthen the compelling arguments supporting Dual Momentum.

Efficient and rational markets? Lol

100% right.

Arguing that the market is inefficient as you have done here Forummm is supportive of the central thesis of momentum investing, and counter to the random walk theory from which buy and hold indexing is originated.

And don't take my word for it. Take Sol's. Here is his quote from 8/22 in another thread.

"Quote from: Pooperman on August 22, 2015, 10:05:22 AM
If markets were rational, there would never be sales or spikes.

I'm not so sure about this.  People always talk about the 2000 tech bubble/crash as an obvious example of irrational markets, but it seemed to make perfect sense at the time.  Prices are based on people's expectations of future profits, so when expectations change prices change.  Expectations can change for all sorts of reasons.

Last month, the prevailing view in the financial pages was that megacorp tech firms were dominating the markets because they are so insanely profitable.  Apple is worth more than Exxon/Mobil but it has 200 billion in cash and a P/E of only 13, so it must still be a good value, right?  Fast forward a month and China devalues their currency and Iran is dumping oil during a glut and the fed is raising interest rates, and suddenly everyone's expectations for the future are not so rosy anymore.

Nothing really changed over that month other than how people think the future will unfold, given some new information.  It seems perfectly rational to me for people one month ago to expect Apple and Google and Amazon and Facebook to continue to mint their own money.  It also seems perfectly rational to me for people today to think profits will mean-revert.  A 10% price swing on those rational expectations doesn't strike me as anything freakishly unusual."
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thepokercab

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Re: Dual Momentum Investing
« Reply #694 on: August 26, 2015, 10:43:54 AM »

Momentum is partly predicated on irrational human behavior and groupthink.

The past few days have only served to strengthen the compelling arguments supporting Dual Momentum.

Efficient and rational markets? Lol

Could you elaborate on this?  Not trying to be snarky, just curious? 

This strategy just confuses me because while buy and holders are just all pretty much on the same page right now (i.e. don't sell, just keep steady, and hope the market continues to rise in the future) one dual momentum investor can be looking for something completely different from another. 

For instance, the s&p is down like 10%.  Dual Momentum investor A lookback period happened over the last few days and is now ALL in on bonds or cash.  She's seen this as confirmation of her signal to get out of one asset class and into another.  Where as dual momentum investor B is 2 months away from his lookback, and wouldn't you know it, the market goes ahead and rebounds and because of that rebound Investor B stays in stocks, where as investor A is probably feeling more than a bit burned at that moment. 

Or, let's say over the next two months the market drops another 10%.  In that case Investor A is now patting herself on the back because she got out 'early' and got less of the downside than Investor B.

To me this just seems pretty random. One person, by virtue of their lookback period, seems to have timed the market better than another.   

You seemed confused on the look back period.

No matter what your look back period is, you check your signal once a month. So if your look back period is six months, then once a month you calculate the total returns of the past 6 months. If your look back is 12 months then once a month you check total returns for the prior 12 months.

Hope that clears up your question.

Ahh, i see.  That does make more sense.  Thanks. 

ChaseJuggler

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Re: Dual Momentum Investing
« Reply #695 on: August 26, 2015, 12:19:57 PM »
For what it's worth, my lookback is 6 months and my day to check is Monday. VTI needs to shoot up about 7% by then, or I'm switching to 100% bonds.

I love what  innerscorecard said. The fact that this is difficult to do is a big part of why I think it will work. But only time will tell!

brooklynguy

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Re: Dual Momentum Investing
« Reply #696 on: August 26, 2015, 12:24:52 PM »
Arguing that the market is inefficient as you have done here Forummm is supportive of the central thesis of momentum investing, and counter to the random walk theory from which buy and hold indexing is originated.

And don't take my word for it. Take Sol's. Here is his quote from 8/22 in another thread.

"Quote from: Pooperman on August 22, 2015, 10:05:22 AM
If markets were rational, there would never be sales or spikes.

I'm not so sure about this.  People always talk about the 2000 tech bubble/crash as an obvious example of irrational markets, but it seemed to make perfect sense at the time.  Prices are based on people's expectations of future profits, so when expectations change prices change.  Expectations can change for all sorts of reasons.

Last month, the prevailing view in the financial pages was that megacorp tech firms were dominating the markets because they are so insanely profitable.  Apple is worth more than Exxon/Mobil but it has 200 billion in cash and a P/E of only 13, so it must still be a good value, right?  Fast forward a month and China devalues their currency and Iran is dumping oil during a glut and the fed is raising interest rates, and suddenly everyone's expectations for the future are not so rosy anymore.

Nothing really changed over that month other than how people think the future will unfold, given some new information.  It seems perfectly rational to me for people one month ago to expect Apple and Google and Amazon and Facebook to continue to mint their own money.  It also seems perfectly rational to me for people today to think profits will mean-revert.  A 10% price swing on those rational expectations doesn't strike me as anything freakishly unusual."

Huh?  Forummm's point and Sol's point (in the quoted text from the other thread) seem to be diametrically opposed.  Forummm's point seemed to be that these wild market gyrations were irrational, having no basis in any underlying change in material information (which, as you pointed out, is inconsistent with the efficient market hypothesis), while Sol's point was that even market gyrations that might appear to be irrational are in fact not so, because they can be explained by the incorporation of new material information into the market's expectations (which is consistent with the EMH).

milesdividendmd

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Re: Dual Momentum Investing
« Reply #697 on: August 26, 2015, 12:40:02 PM »

Arguing that the market is inefficient as you have done here Forummm is supportive of the central thesis of momentum investing, and counter to the random walk theory from which buy and hold indexing is originated.

And don't take my word for it. Take Sol's. Here is his quote from 8/22 in another thread.

"Quote from: Pooperman on August 22, 2015, 10:05:22 AM
If markets were rational, there would never be sales or spikes.

I'm not so sure about this.  People always talk about the 2000 tech bubble/crash as an obvious example of irrational markets, but it seemed to make perfect sense at the time.  Prices are based on people's expectations of future profits, so when expectations change prices change.  Expectations can change for all sorts of reasons.

Last month, the prevailing view in the financial pages was that megacorp tech firms were dominating the markets because they are so insanely profitable.  Apple is worth more than Exxon/Mobil but it has 200 billion in cash and a P/E of only 13, so it must still be a good value, right?  Fast forward a month and China devalues their currency and Iran is dumping oil during a glut and the fed is raising interest rates, and suddenly everyone's expectations for the future are not so rosy anymore.

Nothing really changed over that month other than how people think the future will unfold, given some new information.  It seems perfectly rational to me for people one month ago to expect Apple and Google and Amazon and Facebook to continue to mint their own money.  It also seems perfectly rational to me for people today to think profits will mean-revert.  A 10% price swing on those rational expectations doesn't strike me as anything freakishly unusual."

Huh?  Forummm's point and Sol's point (in the quoted text from the other thread) seem to be diametrically opposed.  Forummm's point seemed to be that these wild market gyrations were irrational, having no basis in any underlying change in material information (which, as you pointed out, is inconsistent with the efficient market hypothesis), while Sol's point was that even market gyrations that might appear to be irrational are in fact not so, because they can be explained by the incorporation of new material information into the market's expectations (which is consistent with the EMH).

Exactly Brooklyn. That was the point.

Forummm is inexplicably arguing against DM  by arguing against efficient markets. Everything about this argument is counterproductive.

Sol, IMO, is wrong. But at least he is internally consistent.
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forummm

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Re: Dual Momentum Investing
« Reply #698 on: August 26, 2015, 01:00:03 PM »

Arguing that the market is inefficient as you have done here Forummm is supportive of the central thesis of momentum investing, and counter to the random walk theory from which buy and hold indexing is originated.

And don't take my word for it. Take Sol's. Here is his quote from 8/22 in another thread.

"Quote from: Pooperman on August 22, 2015, 10:05:22 AM
If markets were rational, there would never be sales or spikes.

I'm not so sure about this.  People always talk about the 2000 tech bubble/crash as an obvious example of irrational markets, but it seemed to make perfect sense at the time.  Prices are based on people's expectations of future profits, so when expectations change prices change.  Expectations can change for all sorts of reasons.

Last month, the prevailing view in the financial pages was that megacorp tech firms were dominating the markets because they are so insanely profitable.  Apple is worth more than Exxon/Mobil but it has 200 billion in cash and a P/E of only 13, so it must still be a good value, right?  Fast forward a month and China devalues their currency and Iran is dumping oil during a glut and the fed is raising interest rates, and suddenly everyone's expectations for the future are not so rosy anymore.

Nothing really changed over that month other than how people think the future will unfold, given some new information.  It seems perfectly rational to me for people one month ago to expect Apple and Google and Amazon and Facebook to continue to mint their own money.  It also seems perfectly rational to me for people today to think profits will mean-revert.  A 10% price swing on those rational expectations doesn't strike me as anything freakishly unusual."

Huh?  Forummm's point and Sol's point (in the quoted text from the other thread) seem to be diametrically opposed.  Forummm's point seemed to be that these wild market gyrations were irrational, having no basis in any underlying change in material information (which, as you pointed out, is inconsistent with the efficient market hypothesis), while Sol's point was that even market gyrations that might appear to be irrational are in fact not so, because they can be explained by the incorporation of new material information into the market's expectations (which is consistent with the EMH).

Exactly Brooklyn. That was the point.

Forummm is inexplicably arguing against DM  by arguing against efficient markets. Everything about this argument is counterproductive.

Sol, IMO, is wrong. But at least he is internally consistent.

Forummm was just being funny. The markets are both rational and irrational. You have lots of people trying to get an edge and guess where things are going. You have lots of people who jump in and out of positions. You have lots of people reacting and overreacting to news. In the long run if you B&H you make the market return, and don't care about all this gaming. If you DM, it's unclear what happens to you, and you are part of this attempt at gaming. Maybe your signals point in the right direction, maybe they lead you astray.

My illustration of the short term (hours) seemingly random fluctuations is not necessarily instructive of a 6 or 12 month long lookback period. However, I think that there is clearly some momentum that does take place from time to time. But being able to capitalize on it using a backtested formula is another question. Especially when that formula lags B&H half the decades.

brooklynguy

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Re: Dual Momentum Investing
« Reply #699 on: August 26, 2015, 01:05:55 PM »
Exactly Brooklyn. That was the point.

Ah, I missed that.

Quote
Forummm is inexplicably arguing against DM  by arguing against efficient markets. Everything about this argument is counterproductive.

Well, I think forummm's point was not only that the market can be irrational, but that it can be totally random.  For the DM technical trading scheme to work, the market needs to be nonrandom in a predictable way (so that you can exploit the nonrandom trends).

Quote
Sol, IMO, is wrong.

In my opinion too (and I've had extended debates with him about it, particularly this discussion, which he described as having turned into an "ouroboros" of back and forth circularity), but note that strict adherence to the EMH is not a prerequisite for subscription to a passive buy and hold indexing investment philosophy.  I think the idea of the stock market as a short-term voting machine and a long-term weighing machine is more accurate than strong versions of the EMH, but I still use an indexing strategy to capture the average market performance minus costs.  As long as the market's long-term trend is up, that strategy will work.