I decided to code and backtest Andrew Clenow’s now famous Rotation of momentum stocks strategy. (as mentioned in this book )
Some fascinating observations from the data set but before that lets jot down the strategy settings.
· We rank the entire universe of stocks on its last 90 days momentum.
· We buy the top 10 among that list.
· We sell the stocks if they are NO longer in the top 50 most moving stocks. (Worstrankheld)
· We sell the stock if they fall more than 20% from their peak. (Trailing stop)
We buy or sell on the closing price of the day signal was generated.
We have not included any brokerage, slippage etc.
This current dataset is not the best out there. (Lot of biases must have crept in)
Here are the results.
Time range: 2006–2017
Starting Equity : 1000000
Ending Equity: 31222584.32
Net Profit :3022.26%
Find below the equity curve.
But unfortunately, this strategy in its current crude form is not implementable. Reason: No downside protection AT ALL.
See below the drawdown curve.
That is painful 54.82% DEEP CUT making BUY and HOLD look like a better, much better option (with better peace of mind, less churn and better tax treatment).
Of course Clenow does not use it for his hedge fund. This was only an exercise in demonstrating the “Momentum Effect” and the simple fact that what goes up, keeps going up before revert to the mean syndrome kicks in and it can be captured (EVEN WITH CRUDE BASIC RULES).
here is the list of some SUPER STOCKS this strategy captured.
and here is the month on month breakup of the same.
Now, this is only the starting point of the research. The above data only gives us an indication that Markets are NOT efficient and Momentum anomaly is there visible if you are not blinded by commitment and consistency.
Next leg of the research is where you fine tune this further to make it a workable model.
Volume filters, Broad market filters to sit out the bad times, smoothing filters to prune out frog in the pan moves (wesley gray’s analogy) or EARNING filter as used by william o neil and his disciples.
P.S #MWM strategy had a MAX drawdown of 28% with a CAGR return of 40.23% for the same time period.
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