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 .
We've seen a lot of volatility this past month in the market, due in part to the FED announcing potential increase in rate this month. I expect more volatility near the end of the month as we'll see if the FED increase rates, and BREXIT election. The SP 500 remains above it's 200ma and the S1TH is still above 65 %, so risk on . Journal has been updated as well.