Author Topic: Dual Momentum Investing  (Read 161771 times)

sol

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Re: Dual Momentum Investing
« Reply #850 on: September 22, 2015, 11:11:23 AM »
I don't see how DM would change stock market, it isn't like they are pulling money out of markets, I didn't see cash as part of the rotations of things to go into

You didn't look very closely.  Some use cash, some use Tbills.

And the "stock market" means stocks, not any of the alternatives.  Most of the DM market timers here sold 100% of their stocks in September and moved to cash or cash equivalents, so they yes they totally did pull money out of market.

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Re: Dual Momentum Investing
« Reply #851 on: September 22, 2015, 11:41:13 AM »

I don't see how DM would change stock market, it isn't like they are pulling money out of markets, I didn't see cash as part of the rotations of things to go into

You didn't look very closely.  Some use cash, some use Tbills.

And the "stock market" means stocks, not any of the alternatives.  Most of the DM market timers here sold 100% of their stocks in September and moved to cash or cash equivalents, so they yes they totally did pull money out of market.

Sol's correct.

DM investors impact the market just as all investors impact the market whenever we trade.

We just don't trade very often, so it is kind of a non issue, in practice.
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milesdividendmd

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Re: Dual Momentum Investing
« Reply #852 on: September 22, 2015, 03:18:51 PM »
It's amazing how just volatile this market has been of late.

Fed doesn't tighten? Market drops.

No news today? Market drops.

It makes me wonder what would happen if there were actual bad news?

It sure seems like the market on pins and needles.

(And that observation is not worth the paper it was printed on, ((and there was no paper involved.))
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milesdividendmd

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Re: Dual Momentum Investing
« Reply #853 on: September 30, 2015, 06:01:55 PM »
Is this month going to be an example of DM investors getting whipsawed?  What price would the S&P500 have to close at on October 1 to cause you to sell out of treasuries/cash and buy back into the market?  What would your effective losses (missed appreciation plus transaction costs plus taxes) be on having followed a DM strategy in this case?

Conversely, what price would the S&P500 have to close at on October 1 for you to have profited, in this instance, on following a DM strategy?  Is it just the Sept 1 price of 1913.95 plus frictional costs plus the 1 month of returns on whatever other asset (treasuries/cash?) you moved into instead?

The month isn't over yet and volatility is so high these days that I won't pretend to know what the October 1 price will actually be.  But watching this strategy unfold in real time in this thread has highlighted for me that every asset class swap a DM trader makes is essentially a bet against the 30-day future price of the asset they sold out of, relative to the asset they bought into, minus any trading costs and/or taxes.  If every trade is just a bet against the 30-day future price, how does the strategy compare to just buying put options?

Every strategy is going to have good and bad months, and I'm not posing these questions to pick on one.  Whipsaws are a recognized risk of a DM strategy, an accepted infrequent loss that you swallow in exchange for the downside protection you expect to get most of the time.  I'm just trying to look forward a little, to establish expectations for how this strategy will perform compared to a buy and hold strategy depending on what the market might do in the short term. 

If I understand correctly, a DM trader who swaps out of stocks, as some people here seem to have done, is essentially betting that the short term price change of the stock market will continue to move down until it is below some new lower specific price determined by the frictional trading costs and the expected return of the alternative investment, which is typically well known for 30 day treasuries or cash.  If they are correct, they will have avoided a known amount of paper losses but maybe incurred some transaction costs.  If they are incorrect, they will have incurrred a known amount of paper losses, plus maybe some transaction costs.  I'm just not clear on the relative quantities of the losses in those two scenarios and how it relates to the real future market price relative to the price they're betting it will fall below.


In the middle of the month there was some speculation ( after an up day for the market) about what would happen at months end for DM investors.  My argument at the time was that such speculation was pointless and that the only rational approach was to analyze returns at the end of the month when action would be taken.

Now that the end of the month has arrived, here is how it played out for me.

My 3 options in my retirement accounts VBITX (short bonds), FSPNX (Developed international) and VIIIX (S&P)

On 8/31 I sold out of FSPNX and bought into VBITX

Here are the returns for september

VBITX  8/31 close  10.51    9/30 close  10.54  (return +0.03%)
FSPNX 8/31 close  37.31    9/30 close  35.57  (return -4.7%)
VIIIX   8/31 close  180.85    9/30 close  175.41  (return -3.0%)

So my returns were helped in September by the DM strategy.   But I'm not implying that that one data point means anything.  It doesn't.

Has DM correctly identified an early bear market?  who knows?

But my sense (based on the market's volatility and large negative reactions to non news) is that it has successfully recognized a market with increased downside risk.  It sure seems like we are one market shock away from badness...

Either way, I'm all in DM in my tax shelterred accounts and will remain so.

Based on a 6 month look back I made no trades this month and remain 100% invested with VBITX.
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boarder42

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Re: Dual Momentum Investing
« Reply #854 on: October 01, 2015, 06:30:46 AM »
lets just hope it has.  i'm going all in on this now with my 401k accounts.
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Dual Momentum Investing
« Reply #855 on: October 01, 2015, 06:43:43 AM »
lets just hope it has.  i'm going all in on this now with my 401k accounts.

You have a lot of balls in the air right now Boarder.

Make sure you do your due diligence.
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boarder42

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Re: Dual Momentum Investing
« Reply #856 on: October 01, 2015, 06:48:04 AM »
i've been all in on it since the first switch to developed international 4-5 months ago.  i guess i should have stated that differently.

and as to my other "ball" as you call it thats in the air.  i have invested 850 dollars and turned that into 8k realized profit.  the risk in that realm is sub zero right now.
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milesdividendmd

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Re: Dual Momentum Investing
« Reply #857 on: October 01, 2015, 10:06:29 PM »
You know I'm rooting for you boarder.
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milesdividendmd

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Re: Dual Momentum Investing
« Reply #858 on: October 14, 2015, 06:45:18 PM »
This was a pretty nice little post with some Asness quotes that seems relevant to some of the above discussion about whether or not DM investing adds to market volatility.

http://blog.alphaarchitect.com/2015/10/14/cliff-asness-quick-hits-quant-land/
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innerscorecard

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Re: Dual Momentum Investing
« Reply #859 on: October 15, 2015, 12:38:04 AM »
The thought that you have to altruistically avoid impacting the smooth ride up of "the market" through the investment choices of how you allocate your hard-earned money is absurd.
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milesdividendmd

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Re: Dual Momentum Investing
« Reply #860 on: October 15, 2015, 01:40:33 AM »

The thought that you have to altruistically avoid impacting the smooth ride up of "the market" through the investment choices of how you allocate your hard-earned money is absurd.

100% agree. The whole ethical purity of indexing argument and the destructive nature of momentum investment argument has always struck me as absurd as well.

On the other hand the question of whether or not trend following (DM)  necessarily increases volatility, price swings, and market "mispricing" prompted some interesting discussion above.

I thought Asness' point about trend following  sometimes allowing assets to revert to their intrinsic value quicker was an interesting one not articulated before in this thread.
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brooklynguy

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Re: Dual Momentum Investing
« Reply #861 on: October 15, 2015, 07:48:03 AM »
The thought that you have to altruistically avoid impacting the smooth ride up of "the market" through the investment choices of how you allocate your hard-earned money is absurd.

I don't recall anyone in this thread arguing that you do, and, in post # 839 above, I specifically expressed my view that you do not.

On the other hand the question of whether or not trend following (DM)  necessarily increases volatility, price swings, and market "mispricing" prompted some interesting discussion above.

I thought Asness' point about trend following  sometimes allowing assets to revert to their intrinsic value quicker was an interesting one not articulated before in this thread.

This is the salient quote from the Alpha Architect post:

Quote from: Asness as quoted in Alpha Architect Post
Second of all, trend following strategies, strategies that buy when things are going up and sell when things are going down, almost definitely do what the critics say: exacerbate near-term volatility, make things move more. That doesn’t mean that they’re crazy. That doesn’t mean that they move the price in the wrong direction…I’m an old University of Chicago guy so this is a major admission for me. We do not live in a world of perfect capital markets. Price is not always exactly equal to value. If price is below value, and it starts to trend back towards value, a trend follower will buy it. They will make it move more herky-jerky. They will make it move faster. They’ll also make it move towards, not away from true value. So when you hear people talk about trend following, sometimes it can make things crazy, but sometimes it can also be helping restore prices. It’s not always making prices more crazy.

Asness seems to have no problem recognizing the unassailable truth that piling onto current price trends will, as a matter of logic, amplify those trends (which you have thus far refused to do, and which the other participants in this thread have apparently not been the first to do (since I highly doubt that Sol and I are the critics Agness refers to)).

Yes, if the market happens to be "incorrectly" valued, and a pricing trend begins back in the direction towards "correct" value, the presence of momentum traders in the market will hasten its reversion to "correctness."  However, like passive indexing, momentum trading completely ignores market fundamentals, so, as we've been arguing all along (and as you've been resisting), whenever the market is headed away from its "correct" intrinsic value, momentum traders will necessarily contribute to pushing the market even further away.  Said differently, in Sol's original words:

Momentum traders are, by definition, irrational market timers.  They are a force of chaos in the market, seeking to disrupt the relationship between prices and earnings by amplifying short term volatility.  When stocks are down, they effectively short them because they want the downward trend to continue.  When stocks are up, they are long because they want the trend to continue.  In both cases they completely ignore market fundamentals.  They don't care about economic conditions or profitability or any sort of sector evolution projections, they only trade on price and they trade on price in such a way that amplifies market volatility.  It's not exactly evil, but it sure doesn't contribute to market stability either.  If you've ever wondered why markets appear to be so inefficient, it's at least partly due to momentum traders trying to cash in on volatility.

milesdividendmd

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Re: Dual Momentum Investing
« Reply #862 on: October 15, 2015, 08:41:23 AM »
Right Brooklyn, Asness is arguing that trend following makes the market both more efficient and less efficient depending on which way the market itself happens to be moving.

I thought it was an interesting point not raised before. I stand by that.

I argued above that we don't even know if dual momentum trading increases or decreases volatility until we know on balance the direction of the market's movement at the time momentum traders make their trades.

You nor anyone else ever answered that point which means that the observation that DM "unassailably" amplifies price trends is in fact very debatable.

Sol's quote strikes me as every bit as unsupported and flighty as the day it was penned.

No support for his claims that DM traders are a "force of chaos", who "seek to disrupt",  or who "effectively short" stocks when they are down. It goes on.

Sol and you have a feeling about momentum's effects on the market, but no evidence that your feelings are based in reality.

No need to  debate the merits of that quote again it's been well dissected already.
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brooklynguy

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Re: Dual Momentum Investing
« Reply #863 on: October 15, 2015, 09:13:58 AM »
Right Brooklyn, Asness is arguing that trend following makes the market both more efficient and less efficient depending on which way the market itself happens to be moving.

I thought it was an interesting point not raised before. I stand by that.

Yep, I agree.

Quote
I argued above that we don't even know if dual momentum trading increases or decreases volatility until we know on balance the direction of the market's movement at the time momentum traders make their trades.

You nor anyone else ever answered that point which means that the observation that DM "unassailably" amplifies price trends is in fact very debatable.

This was my answer:

Quote
I would argue that every trade which moves WITH the dominant price movement  of the asset that is being traded at that moment contributes to volatility, and every trade that moves against the dominant movement of that asset decreases volatility. Volatility occurs when everybody moves to the same side of the boat at once. when there is an imbalance between buy and sell pressure is when you see big price movements.

Good point.  Only in a vacuum would every trade increase volatility.  The point we've been trying to make, though, is that momentum traders, unlike indexers, always move to the crowded side of the boat.  The strategy, as sol said, is to pile on to current price trends.

Quote
So in order to answer whether or not any one strategy increases or decreases volatility overall you should know The probability that the trades being made with that strategy have of moving with or against the market at the moment they are made.

None of us knows this information, I guess. but I can tell you anecdotally that my trades have gone through both with and against price movement at the time they were traded thus far.

No one argued that momentum trading amplifies volatility at the precise snapshot in time when its practitioners execute their trades.  What gets magnified is the market's overall upward or downward trend, as the case may be (the one that serves as the momentum investors' trading signal).  I agree that no evidence has been cited to support this claim (and I suspect that none exists, at least specifically with respect to DM itself, because you are probably correct that there are currently just too few DM traders in the market to have a meaningful effect), but must it not be true, as a matter of logic, that when traders pile on to market movements they will tend to push the market further along in the same direction?  Is there a flaw in the bank run analogy?

You then responded that the bank run analogy is flawed because a bank run's root cause is a loss of confidence in the banking system (which may or may not likewise be true with respect to the stock market in the case of any given pricing trend).  But the purpose of the bank run analogy was only to demonstrate the mechanics of how momentum trading is self-reinforcing.  Momentum traders identify a directional price movement, pile on to it, and thereby enhance it.  I don't need to cite any evidence to demonstrate the truth of this statement (and, as I said, I suspect none may exist, because momentum trading may not currently make up a significant enough percentage of the market to have a meaningful effect), because it is true on an a priori basis.  In other words, I'm not arguing that momentum traders have in fact increased market volatility.  I'm arguing that momentum trading does, by its nature, necessarily contribute to market volatility, and if enough market participants took up momentum trading, they would in fact increase market volatility.

milesdividendmd

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Re: Dual Momentum Investing
« Reply #864 on: October 15, 2015, 09:33:05 AM »
I don't agree that your view of momentum's impact on price movement is true a priori.

In my view of how the market works there are only 2 ways for an individual to effect price movement:  to trade or to convince others to trade. And price movement is amplified only if the market is moving in the same direction of the trade at the moment it is executed.

Unless you can conceive of another way for an individual to effect  price movement, your model is not true a priori.

And if you are not concerned with an individual's impact "at the moment" he trades, then what time period are you speaking about exactly when you speak about volatility?
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brooklynguy

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Re: Dual Momentum Investing
« Reply #865 on: October 15, 2015, 10:22:27 AM »
In my view of how the market works there are only 2 ways for an individual to effect price movement:  to trade or to convince others to trade. And price movement is amplified only if the market is moving in the same direction of the trade at the moment it is executed.

Right.  And momentum traders trade in the same direction the market has been moving, thereby adding to the momentum.

If a run on my local bank has started, and I rush over to withdraw my deposits, I am contributing to the run on the bank (which, as you said earlier, may be a smart thing to do (at least in the absence of FDIC protection), but that's beside the point).  What you seem to be arguing is that I am not contributing to the bank run if, on that day, sentiment happens to shift and other depositors come to the bank to make additional deposits.  On balance, the decline in total deposits may have slowed (analogous to a reduction in volatility), but it was those other depositors who caused it, not me.  My activity had the effect of contributing to decline in deposits (the analog of contributing to an ongoing directional price movement in the stock market) -- it just happened to be counterbalanced by other depositors.

Quote
And if you are not concerned with an individual's impact "at the moment" he trades, then what time period are you speaking about exactly when you speak about volatility?

I'm not speaking about any specific time period in particular, but, like you, I'm speaking about price trends, which only occur over time.  It's meaningless to talk about a "trend" at an instant in time.  A trend only happens over a period of time (which could be an hour, a day, a week, or a decade).

Momentum trading involves identifying a pricing trend, over some period, that is already underway, and then following that trend.  The momentum trader executes a trade in the same direction as the trend.  That trade has the effect of amplifying the trend.  The amplification effect may be minimal (and, in the case of a typical trade executed by individual trader like yourself, infinitesimal), and the activity of other traders may counteract the amplification effect, but that is the effect.  It has to be, as a matter of logic.  And the bigger the share of the market momentum traders make up, the stronger the overall effect will be.

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Re: Dual Momentum Investing
« Reply #866 on: October 15, 2015, 10:32:00 AM »
Then you would agree that buying and holding equities also accentuates the long term trend of the stock market. Both the price and and the mean earnings multiple have increased over time after all.
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Re: Dual Momentum Investing
« Reply #867 on: October 15, 2015, 10:36:16 AM »
And what we are discussing right now, you should remember is whether or not DM increases volatility.

Volatility refers to the amplitude and velocity of price movements, I think you will agree.

You still haven't articulated even a plausible theory about how trading against the price movement of the security being traded at the moment it is traded can increase either the velocity or amplitude of that security's price movement.
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Re: Dual Momentum Investing
« Reply #868 on: October 15, 2015, 11:00:08 AM »
If your point is that trend following follows trends then we are in agreement.

That was not Sol's point at all of course.
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brooklynguy

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Re: Dual Momentum Investing
« Reply #869 on: October 15, 2015, 11:04:36 AM »
Then you would agree that buying and holding equities also accentuates the long term trend of the stock market.

Of course.  As the author of Philosophical Economics has put it, "ultimately, the price of equity is determined in the same way that the price of everything is determined--via the forces of supply and demand."  If a trader comes into the market to purchase stock, that will put upward pressure on its price.

And what we are discussing right now, you should remember is whether or not DM increases volatility.

Do you mean DM as opposed to a generic broader category (if one exists) of "momentum trading" in general?  What I've been talking about is the specific strategy of piling on to a directional pricing trend that is already underway, which I understand is only one part of DM.

Quote
You still haven't articulated even a plausible theory about how trading against the price movement of the security being traded at the moment it is traded can increase either the velocity or amplitude of that security's price movement.

I don't follow this.  Would you mind elaborating?

In any event, whatever plausible theory I have failed to elaborate, was the following assertion somehow inaccurate in any way?

Momentum trading involves identifying a pricing trend, over some period, that is already underway, and then following that trend.  The momentum trader executes a trade in the same direction as the trend.  That trade has the effect of amplifying the trend.  The amplification effect may be minimal (and, in the case of a typical trade executed by individual trader like yourself, infinitesimal), and the activity of other traders may counteract the amplification effect, but that is the effect.  It has to be, as a matter of logic.  And the bigger the share of the market momentum traders make up, the stronger the overall effect will be.

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Re: Dual Momentum Investing
« Reply #870 on: October 15, 2015, 11:14:37 AM »
What I am saying is that the only way the price trend is amplified is if a security when bought is moving upwards in price at that instant (or the converse when it comes to selling).

There is no other way to effect the "trend" of price movement.

A trend follower does follow the price trend for a specific look back period. That's self evident.

But It does not follow that this increases or decreases overall volatility in the market.
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Re: Dual Momentum Investing
« Reply #871 on: October 15, 2015, 11:24:10 AM »
What I am saying is that the only way the price trend is amplified is if a security when bought is moving upwards in price at that instant (or the converse when it comes to selling).

Why?  If the trend over the given lookback period was down, but in the minutes before the trader executes the trade the price started trending up, the trade still had the effect of contributing to the downward price movement (or amplifying the downward trend).

Quote
A trend follower does follow the price trend for a specific look back period. That's self evident.

But It does not follow that this increases or decreases overall volatility in the market.

Because that depends on what other market participants are doing, right?  But it does follow that this contributes to the amplification of the directional pricing trend that led the momentum trader to make the trade.

milesdividendmd

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Re: Dual Momentum Investing
« Reply #872 on: October 15, 2015, 01:26:59 PM »

What I am saying is that the only way the price trend is amplified is if a security when bought is moving upwards in price at that instant (or the converse when it comes to selling).

Why?  If the trend over the given lookback period was down, but in the minutes before the trader executes the trade the price started trending up, the trade still had the effect of contributing to the downward price movement (or amplifying the downward trend).



Because every trade goes against the trend for some lookback periods and with the trend for others.

So In your given example the trader is trading with the trend of his lookback period and against the trend of the past few minutes.

He is also decreasing the volatility of price movement in that security  as long as the price is going up at the moment he sells, which is the only time he can directly effect volatility.
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milesdividendmd

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Dual Momentum Investing
« Reply #873 on: October 15, 2015, 06:29:55 PM »
In other words.....

Saying that a trend follower perpetuates the trend of his own lookback period is axiomatic. But that fact tells you literally nothing about the trend follower's contribution to overall market volatility.
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frugalnacho

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Re: Dual Momentum Investing
« Reply #874 on: October 16, 2015, 10:34:03 AM »
I don't really want to jump back in this thread, but I am not following miles line of reasoning.  He seems to be engaging in some weird semantics.  The strategy has momentum in it's name.  By definition the strategy makes you follow the momentum of the market, thus amplifying that momentum.   The entire premise is to get in when the gettin' is good, and get out when it's not.  In order for the strategy to work, it necessarily has to amplify the volatility. 

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Re: Dual Momentum Investing
« Reply #875 on: October 16, 2015, 01:56:17 PM »
Frugal nacho.

It's not semantics.

In order to understand whether or not DM increases the volatility of the market you must understand

1. how any trade can increase or decrease overall market volatility.

2.  Whether or not DM trades are more likely to be volatility increasing trades.

Until you have concrete answers to those questions, the only intellectually honest answer is that you don't know whether DM increases or decreases volatility.
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frugalnacho

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Re: Dual Momentum Investing
« Reply #876 on: October 16, 2015, 03:01:44 PM »
It is semantics.  I don't have to know the exact impact of individual trades to know that overall a strategy that causes you to follow a trend will exacerbate that trend.  It seems to make sense to several other people too.

milesdividendmd

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Re: Dual Momentum Investing
« Reply #877 on: October 16, 2015, 03:53:55 PM »
"Exacerbating that trend" and increasing market volatility are not the same thing.

This might be the source of your confusion.
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brooklynguy

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Re: Dual Momentum Investing
« Reply #878 on: October 17, 2015, 06:05:07 AM »
This might be the source of your confusion.

Yes, this is without a doubt the source of the confusion, because I just spent the lion's share of the past two pages of this thread trying to make the point that momentum trading has the effect of "exacerbating that trend" (after Sol and others spent the preceding six pages trying to make the same point), which you disputed at every turn, and, having just reread those eight pages, I find it impossible to believe that you did not know that that is exactly the point we were trying to make until now.

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Re: Dual Momentum Investing
« Reply #879 on: October 17, 2015, 10:42:57 AM »
That's hilarious.

I found it equally hard to believe that you couldn't understand that "exacerbating the trend," and increasing market volatility were not the same and not necessarily even related.

For fun you should go back and count the number of times I made that very point.
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Re: Dual Momentum Investing
« Reply #880 on: October 17, 2015, 10:48:10 AM »
I used quotes around "exacerbating the trend" because that phrase is unnecessarily judgmental.
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Re: Dual Momentum Investing
« Reply #881 on: October 17, 2015, 11:08:06 AM »

This might be the source of your confusion.

Yes, this is without a doubt the source of the confusion, because I just spent the lion's share of the past two pages of this thread trying to make the point that momentum trading has the effect of "exacerbating that trend" (after Sol and others spent the preceding six pages trying to make the same point), which you disputed at every turn, and, having just reread those eight pages, I find it impossible to believe that you did not know that that is exactly the point we were trying to make until now.

Oh and a small correction.  I don't believe that I ever made the point that trend following doesn't  perpetuate the trend of its chosen lookback period.

In fact I made the opposite point numerous times, that it does (and that this is not necessarily related to increased market volatility.)

It seems to me now, that this whole discussion, starting with Sol's original quote, was just the case of your side conflating these 2 separate claims.

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Re: Dual Momentum Investing
« Reply #882 on: October 21, 2015, 07:56:24 AM »
How is exacerbating the trend and volatility not the same thing?  Your strategy by definition increases the downward trend when the market is dropping, and increases the upward trend when it's rising.  How could that possibly not increase volatility?

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Re: Dual Momentum Investing
« Reply #883 on: October 21, 2015, 09:49:36 AM »
Frugal I just want to point out that I have answered that question multiple times in the past pages. Despite that this the question keeps on getting asked.

I point this out simply to emphasize that I am not playing semantic games, and am not arguing in bad faith.

This is an important distinction and I'm happy to try to answer the question again.

Let's go slow.

How would you define an "increase in market volatility?"

I would define it as an increase in the size and speed of market price movements.

Agree or disagree?
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Re: Dual Momentum Investing
« Reply #884 on: October 21, 2015, 10:41:39 AM »
I would define it as the total variance from the average.  Isn't that how it's commonly defined in reference to an investment? It doesn't necessarily have to increase the speed of price movements, but will still add to the magnitude of the price movement. 

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Dual Momentum Investing
« Reply #885 on: October 21, 2015, 11:36:45 AM »
I would define it as the total variance from the average.  Isn't that how it's commonly defined in reference to an investment? It doesn't necessarily have to increase the speed of price movements, but will still add to the magnitude of the price movement.

If that's your definition, then why must the look back period necessarily direct the DM trader to trade in a direction away from the average?  If an overvalued (relative to average value) asset is trending down, or if an undervalued asset is trending up for the lookback period then wouldn't the DM trader be decreasing, not increasing volatility?
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brainfart

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Re: Dual Momentum Investing
« Reply #886 on: October 21, 2015, 12:13:59 PM »
Sheesh... this is getting old.

Can't we just agree that dual momentum investing will most likely cause the total collapse of the world's financial system (and not some real threat like a humongous derivatives bubble), and move on to more interesting topics?

Like e.g. how this can be implemented by non-USians without access to tax advantaged 401ks, EAFE funds etc? Thanks.

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Re: Dual Momentum Investing
« Reply #887 on: October 21, 2015, 12:36:44 PM »
I would define it as the total variance from the average.  Isn't that how it's commonly defined in reference to an investment? It doesn't necessarily have to increase the speed of price movements, but will still add to the magnitude of the price movement.

If that's your definition, then why must the look back period necessarily direct the DM trader to trade in a direction away from the average?  If an overvalued (relative to average value) asset is trending down, or if an undervalued asset is trending up for the lookback period then wouldn't the DM trader be decreasing, not increasing volatility?

I'm saying the overall cumulative effect of all DM traders necessarily increases volatility.  At times some trades may be driving the price back toward the mean, thus decreasing volatility, but the overall cumulative effect of all DM trades must be towards increasing volatility. Otherwise the strategy wouldn't work.

And because the strategy doesn't call for you to only sell when the price is trending down, but still overvalued.  It calls for you to sell when it's trending down, period.  That includes times when it's over valued and undervalued (or even accurately valued).  I just don't see how the cumulative effect could be anything but increasing volatility. 
« Last Edit: October 21, 2015, 12:41:30 PM by frugalnacho »

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Re: Dual Momentum Investing
« Reply #888 on: October 21, 2015, 12:49:54 PM »
To explain it a bit further....

The trades a DMer makes when the asset is over valued and trending back down towards the mean will cancel out with the trades that are made when the asset is under valued and trending back towards the mean.  But when it's over valued and trending up your trades will push the price even higher from the mean.   When it's undervalued and trending down your trades will drive it further down.  The price will still average out to the same mean, but the highs and lows will be exacerbated - the very definition of volatility. 

milesdividendmd

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Re: Dual Momentum Investing
« Reply #889 on: October 21, 2015, 02:04:30 PM »

I would define it as the total variance from the average.  Isn't that how it's commonly defined in reference to an investment? It doesn't necessarily have to increase the speed of price movements, but will still add to the magnitude of the price movement.

If that's your definition, then why must the look back period necessarily direct the DM trader to trade in a direction away from the average?  If an overvalued (relative to average value) asset is trending down, or if an undervalued asset is trending up for the lookback period then wouldn't the DM trader be decreasing, not increasing volatility?

I'm saying the overall cumulative effect of all DM traders necessarily increases volatility.  At times some trades may be driving the price back toward the mean, thus decreasing volatility, but the overall cumulative effect of all DM trades must be towards increasing volatility. Otherwise the strategy wouldn't work.

And because the strategy doesn't call for you to only sell when the price is trending down, but still overvalued.  It calls for you to sell when it's trending down, period.  That includes times when it's over valued and undervalued (or even accurately valued).  I just don't see how the cumulative effect could be anything but increasing volatility.

The DM strategy calls for you to buy when the security price is trending up relative to other securities for your lookback period and sell when the total returns are less than t bills for your lookback period.

If you can demonstrate that prices are more likely to be "above average" for the first instance and "below average" for the second then you would be correct, but this is not necessarily the case at all.

Incidentally my definition of volatility was referring to volatility as captured in the VIX fear index, in other words rapid and unexpected price movements reflective of investor fear/sentiment.  I believe this is what Sol was referring to in his original argument, but I could be wrong.
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milesdividendmd

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Re: Dual Momentum Investing
« Reply #890 on: October 21, 2015, 02:07:01 PM »

Sheesh... this is getting old.

Can't we just agree that dual momentum investing will most likely cause the total collapse of the world's financial system (and not some real threat like a humongous derivatives bubble), and move on to more interesting topics?

Like e.g. how this can be implemented by non-USians without access to tax advantaged 401ks, EAFE funds etc? Thanks.

Sorry man!

What do you have access to in terms of low cost index funds, and what are your tax liabilities where you live?
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arebelspy

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Re: Dual Momentum Investing
« Reply #891 on: October 24, 2015, 02:51:31 AM »
Oh boy, catching up on this thread was a fun read.  :P

A meta comment for miles:
Frugal I just want to point out that I have answered that question multiple times in the past pages. Despite that this the question keeps on getting asked.

If it keeps getting asked, you may want to consider that the people asking feel that it hasn't been answered.

You say you've answered it, but either your point didn't come across, or they feel like it wasn't answered at all (sidestepped, or whatever).

When a question gets answered, it may come up again, but rarely over and over in the same short time/space period.  You may want to understand that those questioning are not having their questions answered, despite you claiming you have.

Quote
I point this out simply to emphasize that I am not playing semantic games, and am not arguing in bad faith.

As the saying goes:
Quote
"The first time someone calls you a horse you punch him on the nose, the second time someone calls you a horse you call him a jerk but the third time someone calls you a horse, well then perhaps it's time to go shopping for a saddle."

You feel like you aren't, but considering this keeps happening, it may be time to consider why.  :)

------------------------------------

On topic, I agree that it seems obvious that a momentum strategy leads to more momentum. Whether or not you find that problematic in terms of sol's quote, it certainly doesn't lead to a stability of markets.
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milesdividendmd

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Re: Dual Momentum Investing
« Reply #892 on: October 24, 2015, 09:48:06 AM »

Oh boy, catching up on this thread was a fun read.  :P

A meta comment for miles:
Frugal I just want to point out that I have answered that question multiple times in the past pages. Despite that this the question keeps on getting asked.

If it keeps getting asked, you may want to consider that the people asking feel that it hasn't been answered.

You say you've answered it, but either your point didn't come across, or they feel like it wasn't answered at all (sidestepped, or whatever).

When a question gets answered, it may come up again, but rarely over and over in the same short time/space period.  You may want to understand that those questioning are not having their questions answered, despite you claiming you have.

Quote
I point this out simply to emphasize that I am not playing semantic games, and am not arguing in bad faith.

As the saying goes:
Quote
"The first time someone calls you a horse you punch him on the nose, the second time someone calls you a horse you call him a jerk but the third time someone calls you a horse, well then perhaps it's time to go shopping for a saddle."

You feel like you aren't, but considering this keeps happening, it may be time to consider why.  :)

------------------------------------

On topic, I agree that it seems obvious that a momentum strategy leads to more momentum. Whether or not you find that problematic in terms of sol's quote, it certainly doesn't lead to a stability of markets.

ARS,

Welcome back.

I was obviously more than happy to keep on answering the same question over and over.

It's also obvious that I wasn't doing a very good job answering it, since your side kept on asking the same question.

From my perspective I spent several Pages arguing that 2+2 does in fact equal four.  And the other side kept on arguing that it equaled three because 3 = 4.

Would you now like to start a several page argument on whether or not 2 +2 equals five?

(I.e. would you now like to start a new argument that "momentum" and "volatility" are the same thing? I would argue that they are not, and the dictionary would back me up, I think.)
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starguru

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Re: Dual Momentum Investing
« Reply #893 on: October 24, 2015, 10:55:55 AM »
I would agree that momentum and volatility are NOT the same thing.  But they are connected.  It seems logical to me that *frequent* changes in momentum could contribute to volatility. 

But DM traders would only trade once per month max.  I don't think that counts as frequent.  And I don't think any DM contribution to volatility makes it an invalid strategy.   Would we consider BH invalid because it contributes to volatility when people get paid and contribute to their 401ks twice a month (typically), once a month more than DM investors? 

It seems to me that emotion based investing, what many individual investors do, contributes much more to volatility.  Same for technical trading, and automated trading.

DM is a strategy that has strict rules, takes emotion out of the equation, and historically would lead to few trades a year.  We can argue if its better than B&H, but invalidating it because of its effects on volatility seems senseless to me.

I say this as a B&H follower.

arebelspy

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Re: Dual Momentum Investing
« Reply #894 on: October 24, 2015, 11:39:49 AM »
(I.e. would you now like to start a new argument that "momentum" and "volatility" are the same thing? I would argue that they are not, and the dictionary would back me up, I think.)

They may not be exactly the same, but sure, enlighten me on the major differences.  I don't need a dictionary definition, but a simple example to answer the following question should suffice.

How would more momentum lead to less volatility?
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« Reply #895 on: October 24, 2015, 11:55:24 AM »
Why on earth would I argue that more momentum leads to less volatility?

That's an argument that I certainly never made. (Nor did anyone else that I recall off hand.)

(You may want to read the thread again.  It's been a while and you may be rusty :) )

To bring you up to speed, the only argument that I have made is that DM trading does not necessarily lead to increased volatility. Some trades will lead to more volatility and some trades will lead to less volatility (by either definition).  And on balance it is completely unclear whether DM increases or decreases volatility as a whole.

What is quite obvious to anyone with a brain, is that DM on the scale at which it is practiced by me or any other individual investor on this forum has no measurable effect on overall market volatility.
« Last Edit: October 24, 2015, 11:57:08 AM by milesdividendmd »
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sol

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Re: Dual Momentum Investing
« Reply #896 on: October 24, 2015, 12:02:18 PM »
What is quite obvious to anyone with a brain, is that DM on the scale at which it is practiced by me or any other individual investor on this forum has no measurable effect on overall market volatility.

I have a brain, and it's not obvious to me.

Volatility is just short term momentum.  Lots of momentum traders, trading on different dates in the same direction that the market is moving on that day, will increase short term momentum, which is volatility.  The next day if the market direction reverses for some reason unrelated to momentum traders, all of the momentum traders who trade that day will trade again in the new direction, increasing short term momentum again.  Two days, two different groups of momentum traders with different trade dates, amplifying the market gyrations.  Creating volatility.

Seems obvious to anyone with a brain, right?

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Re: Dual Momentum Investing
« Reply #897 on: October 24, 2015, 12:08:04 PM »

What is quite obvious to anyone with a brain, is that DM on the scale at which it is practiced by me or any other individual investor on this forum has no measurable effect on overall market volatility.

I have a brain, and it's not obvious to me.

Volatility is just short term momentum.  Lots of momentum traders, trading on different dates in the same direction that the market is moving on that day, will increase short term momentum, which is volatility.  The next day if the market direction reverses for some reason unrelated to momentum traders, all of the momentum traders who trade that day will trade again in the new direction, increasing short term momentum again.  Two days, two different groups of momentum traders with different trade dates, amplifying the market gyrations.  Creating volatility.

Seems obvious to anyone with a brain, right?

The last comment wasn't  to say that a DM trader can't under some circumstances make a trade that microscopically increases (or decreases) volatility.

It was simply an observation of scale.

If you or I trade our entire portfolio at any one time it effects the global capital markets much as a tear drop effects the salinity of the ocean.

We have no measurable market impact by virtue of our small size.
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Re: Dual Momentum Investing
« Reply #898 on: October 24, 2015, 12:11:38 PM »
I'm confused--are you saying momentum trading does not lead to volatility, or that it does, but your portfolio is too small for it to be significant?  Which one are you arguing for now?
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« Reply #899 on: October 24, 2015, 12:14:31 PM »
Sol,

I tend to agree generally with your definition that "volatility is just short term momentum", but I would be more specific.

Volatility is instantaneous momentum.

What has not been successfully argued yet by you or anyone, is that there is any relationship between the price momentum of a specific look back period between 3 and 12 months and the price movement at the moment that a DM trader places his trade.
« Last Edit: October 24, 2015, 12:29:40 PM by milesdividendmd »
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