Market Musings 130124: Follow The Leaders

13th Jan by Edmund Shing

12 comments 2145 reads

Follow the Leaders

What now after an explosive end to 2023?

November and December were excellent months for several asset classes, including stocks, bonds, gold and even listed real estate.

The main motors of this ‘everything rally’ were a combination of lower long-term interest rates (bond yields) plus abundant macro liquidity provided by central banks such as the US Federal Reserve and the People's Bank of China.

In fact November and December represented the biggest 2-month improvement in US financial conditions ever seen! 10-year bond yields declined by around 1% in the US over this period from 5% to 4%.

So while this shift in financial conditions was a boon to investors worldwide, this scale of boost to stocks is unlikely to be repeated.

Over the course of 2024, central banks in the US, Euro area and the UK should begin to cut their benchmark interest rates, as inflation rates continue to return closer to the 2% long-term target. Indeed, in the Euro area inflation rates are likely to fall below 2% sooner rather than later, given the lack of growth and relatively weak household demand, plus lower energy costs.

However, this is already anticipated by financial markets. So this then begs the question: what will propel stock market higher or lower from here?

Many stock markets have returned close to multi-year highs

While UK stocks remain out of favour in relative terms, many other stock markets around the world have rebounded to or close to multi-year highs in the last couple of months: the US S&P 500 and Nasdaq 100, the Japanese Nikkei 225, the Brazilian Bovespa, the Mexican IPC, the Euro STOXX 50 and the Italian FTSE MIB.

Employing a simple Dual Momentum asset allocation strategy

One way to decide whether or not to continue to invest in stocks now is via a mechanical strategy such as the Dual Momentum Strategy.

In its simplest form, Dual Momenum considers two types of momentum to choose which asset class to invest in, between stocks, bonds and cash:

Absolute momentum: has the asset gone up over a specified time period (such as 12 months) or not? Then consider
Relative momentum: which of two assets (eg global stocks and global bonds) has performed best over this same time…

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Epitychia

13th Jan

Interesting. I know dual momentum works for stocks, but any back tests for asset classes?

Edmund Shing

Hi there

yes check dualmomentum.net, Gary Antonacci’s website . He discusses his Global Equity Momentum strategy there.

best

edmund

KevinS1

14th Jan

Very interesting idea Edmund, but I'd forever be churning my portfolio surely - as a largely buy & hold investor for my core portfolio surely its time in the market that counts?

WarrantStar

Kevin,S1 There are more ways of killing a cat than choking it with cream!

Richard Littlewood

I watched the dual momentum presentation on Gary Antonacci’s website and the performance he claims is impressive. What's more, he seemed to have taken a scientific approach and effectively back tested his strategy. I came away feeling quite enthusiastic about dual momentum.

Then I decided to look at the Amazon book reviews for his book. Now, these are generally very positive, but what I found more interesting were the detailed criticisms of his methodology in the small number of well written 1 and 2* reviews, for instance here. These provide some useful balance.

I got the impression he is actively promoting dual momentum as part of his business (and selling his book) and is not inclined to talk any potential disadvantages. For instance, it may give better bear market performance but at a greater risk of rare but large whipsaw losses (buying high, selling low). Worse, there were some issues raised about selective use of data to bolster his arguments. It's hard to know how to weigh these criticisms without spending a lot of time on the subject, but it's good to know they exist.

I came away feeling that I should probably use momentum more in allocating between tracker funds, bonds and cash (as opposed to buy and hold in my case) but unconvinced I should go all in on his method. I'd be interested to hear others thoughts.

pka

15th Jan

Hi Edmund,

Thanks for this very interesting post.

You wrote: "We can consider only stock markets or sectors that have not only gone up over the last 6 months but which are also above their own 200-day moving averages."

Perhaps a roughly equivalent approach to the one you suggested might be to use the justETF website to rank ETFs that are available on the UK stockmarket by their 6 month previous total returns, but to only consider those ETFs that have both positive 6 month and 1-year total returns. To minimise trading costs, it might be prudent to only consider ETFs that are larger than £500 million, because they are likely to have the lowest bid-offer spreads.

Hi Richard, I've read Gary Antonacci’s 'Dual Momentum Investing' book and looked at his website and and found them both readable and interesting. I've also read the critical Amazon book review you linked to by yogiyoda: https://www.amazon.com/review/...

Another web page commenting on Antonacci's strategy is this one by Ben Carlson: https://awealthofcommonsense.c...

It seems to me that both 'buy and hold' and 'Dual Momentum' have pros and cons as investment strategies, but when one strategy is performing well the other is likely to be performing less well. So a compromise approach would be to use 'buy and hold' for part of one's portfolio and 'Dual Momentum' for the remainder. The relative weightings of those two parts would be up to individual investors to decide what suits them best.

Hi,

Ben Carlson's comments are an interesting read, thanks for that. He's not wrong about the psychological factors. I'd struggle pulling out of UK equities, I'm frightened I'll miss out on the mean reversion I've been waiting so long for!

16th Jan

I'm experimenting with Dual Momentum in part of my portfolio. To overcome the psychological difficulty mentioned by Ben Carlson's web page here:

https://awealthofcommonsense.c...

of going 'all in' at any one time, I am using a 'rotational' strategy in the Dual Momentum part of my portfolio. I own a few different ETFs that have performed well over the previous year, based on the 'total return' data that is available on the justETF website. If the performance of any of my ETFs declines relative to another in my pre-prepared list of candidate ETFs that is not currently in my portfolio, I will sell and replace that ETF with the better performing one (assuming the replacement ETF had a non-negative previous 1-year return). My hope is that this will lead to gradual changes in this part of my portfolio over a year, rather than the abrupt changes implied by Gary Antonacci's original Dual Momentum strategy.

derekwhogg

18th Jan

That’s very interesting. I am keen to test this strategy with at least part of my portfolio. Of course, I immediately want to finesse the system as Edmund suggested by looking for sectors with the highest momentum rather than just sticking with MSCI/global bonds/ cash or money market fund.

Sorry for asking a basic question but can anyone recommend a website/resource which has charts covering various indices with moving averages etc? I am registered on Stocko but only for UK shares, and use Interactive Investor to trade.

Any suggestions welcome!

Snowbum

TradingView, free option should meet your needs. Stocko charts likely would too! (Search for the index ticker, ie NDX, UKX, SPX etc, select chart and add your indicators). If prefer external option see below for the one I use.

https://www.tradingview.com/

Hi Derek,

You wrote: "can anyone recommend a website/resource which has charts covering various indices with moving averages etc?"

I've created a fantasy Folio on Stockopedia containing ETFs that are available on the UK stock market that track the indices I'm interested in. Most ETFs have low tracking errors and low Total Expense Ratios, so they track their indices fairly closely.

I can then view the past performances of the ETFs in the Folio graphically using the Chart View option. If I select a view range of 3 or 6 years, the 200 day Simple Moving Average curve is displayed on the chart of each ETF.

I also find the justETF website useful. Unfortunately, it doesn't provide information on moving averages, so I use the previous 1-year % total return as a proxy for the 200 day moving average.

For example, the ETF with ticker code SWDA tracks the total return of the MSCI World index (which tracks stocks from 23 developed countries), CSP1 tracks the S&P 500 index, CNX1 tracks the NASDAQ 100, CUKX tracks the FTSE 100, FTAL tracks the FTSE All Share, IGLT tracks UK Gilts, INXG tracks UK index-linked Gilts, AGBP tracks a global aggregate bond index hedged to GBP, and SGLN tracks the spot price of gold.

Market Musings 130124: Follow the Leaders

Follow the Leaders

What now after an explosive end to 2023?

Many stock markets have returned close to multi-year highs

Employing a simple Dual Momentum asset allocation strategy

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Edmund Shing

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