The US Momentum Strategy: What we don't know and what we do know

The US Momentum Strategy: What we don't know and what we do know

Trading and investing is full of uncertainty, partly because the process deals with future outcomes, which unfortunately, we have no method of predicting.

That said, when dealing with a back-tested systematic strategy, meaning we can assess how the trading process has worked in the past, we can start to build up a view of what we are likely to experience in the future.

It is by assessing the probabilities of past outcomes, we can build confidence in our trading actions.  

Using the Rivkin Global US Momentum Strategy as an example, let's look at a few things that we don’t know, and a few that we do know.* 

- We don’t know if next month will be a profitable month.

- We do know that historically, 61% of months have been profitable months.

- We don’t know how the strategy will perform over the next 12 months.

- We do know that the average of all 12-month samples is 20.20%. Furthermore, we know that historically, 93% of all 12-month periods yielded a positive return*. See Chart 1

Chart 1

- We don’t know if now is the best time to start the strategy.

- We do know that the longer one commits to the strategy, the greater the likelihood of a positive outcome. See Table 1.

Table 1

- We don’t know if the US share market is about to top out and head into a bear market.

- We do know that given the inclusion of an index (regime) filter as part of the strategy, we will not be left holding a portfolio of stocks through a sustained bear market.

- We don’t know which of our current portfolio holdings will end up as profitable trades.

- We do know that on average, approximately 54% of the stocks held in the portfolio are closed at a profit.

- We don’t know which of our current holdings will go on to be big winners, defined by gains greater than 25%.

- We do know that around 10% of all stocks historically, ended up as big winners. See Chart 2. Furthermore, we do know that it is these big winners that contribute the bulk of performance for this strategy.


Chart 2

- We don’t know how the myriad of global events such as North Korea, the Greek debt crisis, Australian property market, and the Trump Presidency will affect US equity markets.

- We do know that over the past 17 years, the strategy has been invested through many similar global events, and survived.  

- We don’t know how deep the current drawdown will run and when it will be over. 

- We do know that since 2001, there have been 8 drawdowns greater than 15%, the largest being 26.86%.  We also know that the strategy has recovered to new equity highs each time. See Chart 3.


Chart 3.


 In summary, there is plenty about the future we don’t know. However, there is also plenty that we do know about how the US Momentum strategy has performed in the past.

While we will always be faced with uncertainty when investing, and it is likely that the future will not mirror the past exactly; having a solid understanding of a strategies historical performance profile goes a long way to putting our minds at ease.

*All figures and statistics reference the 2001 to March 2017 period past performance is no guide to future performance.

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