I wanted to write a short article flagging up a nice and simple research paper from Gary Antonacci on the application of absolute momentum to stocks, indices and asset classes.
He is the doyen of research on price momentum in financial markets, and has recently written a book called Dual-Momentum Investing. But a quick and surprisingly readable (given much of the over-complicated academic research papers I have read in the past) academic paper summarising some of his key conclusions can be found in this research paper on Absolute Momentum, which is free to download from SSRN.
According to this paper, you can devise a simple momentum strategy for investing in stock, bond and other asset classes (e.g. using index ETFs) by the simple application on a monthly basis of a 12-month price momentum test: if the 12-month absolute price change is greater than the return on cash (he uses a 90-day US Treasury bill to simulate this, as he uses US-based index data), then invest in the asset, otherwise put the money in cash for the month. This process is then repeated every month.
For such a simple switching strategy, results are surprisingly good and maximum drawdowns (the worst performance over the 1973-2012 period according to this system) are much more limited than buy-and-hold, for instance, as you tend to sidestep most of the falls during bear markets in the case of stock indices. Moreover, because there are not that many switches on average over the years to make, it is an excellent strategy for timing ETF buys and sells within a diversified multi-asset class portfolio, mixing stocks, bonds and commodities.
Lastly, for more details of his other work looking at various facets of momentum investing in financial markets, you can check out Antonacci's website which has a wealth of research on other subjects too, including this fascinating summary of value investing and on combining value & momentum, as is highlighted here with the Stockopedia StockRanks.
Perhaps it is the inner geek coming out in me, so apologies for inflicting that on you, but for anyone wanting to dig deeper into these topics, Mr. Antonacci's work is an excellent, accessible place to start...
Edmund
