Although I practice systematic trading based on strategies that generate short holding periods I keep an open mind towards other styles of trading.  One particular style of trading that has caught my attention recently is ETF momentum systems that require work on only one day per month. Using information from a paper written by Adam Butler, Michael Philbrick, Rodrigo Gordillo and David Varadi titled Adaptive Asset Allocation: A Primer plus rules from Gary Antonacci’s soon-to-be-released book, Dual Momentum Investing: An Innovative Strategy For Higher Returns With Lower Risk, I created my own ETF momentum strategy. The chart below is based on reallocating (if necessary) at the beginning of each month to five ETF’s based on the prior six month price performance of the ETF’s.

ETF Momentum

My model has a compound annual growth rate (CAGR) of 14.7% before fees and 89% of the twelve month periods have a positive return.

The caveat about this type of system is its partial reliance on bond prices increasing as interest rates fall which they have for the past thirty years. I believe this concern is warranted but Antonacci provides a means of taking falling bond prices into account.

If this type of investing is of interest to you I would encourage you to download the paper and order the book. Create your own model and, who knows, you may design a system that’s even better than mine. One parameter that you may want to vary is the look back period for prior price performance.  The common periods are 3 months, 6 months and 12 months.

FJP

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As I add this post in a wild start to October, last month seems tame.  For the month of September I finished with a 0.6% gain and maintain an outperformance relative to the IASG Systematic Trader Index.

 

Systematic Trader Versus Index

Larry Swedroe was recently on one of Michael Covel’s podcasts and he discussed how in times of great uncertainty there is an inclination for investors to look for guidance.  Sometimes that search leads them to listen to what forecasters have to say. Swedroe said “There’s only three type types of forecasters: those who don’t know where the market is going, the second type is those who know they don’t know and the third and most prevalent kind are the ones you see on CNBC or read in Fortune magazine they are the ones who know they don’t know but get paid a lot of money to pretend that they do.”. I remember Dr. Sherry Cooper stating in an interview on CBC in 2008 how, when it comes to market direction, the young economists don’t know that they don’t know. She said “I know that I don’t know.”. At times like this when volatility picks up, despite all the talk in the financial media we must constantly bear in mind that nobody knows what will happen next and that is why I believe in using a rule-based trading system.

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August was a positive month with my trading generating a 3.1% gain.

Systematic Trader Versus Index

The markets are fairly quiet now and my trading activity has dropped off significantly.

On a different note, if you are looking for a new audio podcast to listen to I would suggest “Masters in Business” by Barry Ritholtz which you can find here. Ritholz has interviewed some interesting guests recently such as James O’Shaughnessy and Michael Mauboussin.

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When the markets closed on July 30, my Collective2 account was up 2.3% for the month so I expected to have a positive performance for July. What happened on July 31 killed my performance for the month.  US stocks fell by 2% but worse for me was that volatility shot up and I was short volatility. Fortunately, going into the open on July 31 I had a number of “Sell at Open” orders for the stocks and ETF’s I was holding but my short positions on volatility did their share of damage. My mistake, and it was the biggest one this year, was being short VXX and holding XIV (inverse VIX) at the same time. My short volatility trades had worked well for me earlier in the year and I guess I got complacent.  Lesson learned!

Systematic Trader Versus Index

If you like Dr. Howard Bandy’s work but didn’t know that he is having a free webinar presentation this week to discuss his new book, you can register for the webinar here. The webinar will be recorded and available for viewing later by those who register.

FJP

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