Last month , we explored how momentum could benefit our portfolios , by using the Rate of Change (ROC ) indicator . If the ROC is positive by the end of the month , this would indicate that the asset had positive momentum and vice versa . Backtesting this theory against a basket of sector ETFs, we saw total return of 157 % with annual return of about 8 %.
So what is absolute momentum ? Absolute momentum is an asset excess return , which is calculated by taken the return of the asset for a giving period of time LESS the Treasury bill rate. If the return is positive, then we buy and hold that asset until the absolute momentum turns negative. The advantage of this strategy is the ability to reduce draw down and volatility. Gary Antonacci, covered this topic in his 2013 paper "Absolute Momentum: a Simple Rule-Based Strategy and Universal Trend-Following Overlay ". I strongly recommend that you read it .
This is a very easy strategy to implement, especially with a basket of sectors or country ETFs. In the paper mentioned above , Mr. Antonacci performed a backtest from 1974 to 2012, using a 60/40 balanced portfolio, and the results are quite amazing. See results below.
I quickly created a spreadsheet tracking securities of a traditional 60/40 portfolio , SPY ( S&P 500) and IEF ( 7-10 years Treasury Bond). You can get access to it here , or make sure to bookmark this post.
If you are like me and prefer seeing this information on a chart , I coded an indicator in TradingView showing the absolute momentum. Make sure to go in the Indicators/ Strategies section or on TradingView for details.
I'm a big fan of momentum strategies. They are easy passive investment strategies that are easy to understand and implement. I encourage you to read mr. Antonacc paper on the topic, and to come back to this blog post to see the updated allocations.
Very important to remember that all material published on this blog is for educational and information purposes only as indicated in the disclaimer. Leave a comment below or contact me directly if you have any questions.