LONG TERM PASSIVE INDEX INVESTING NASDAQ optimised using MOMENTUM TRADING strategy. THOUGHTS VERY WELCOME PLEASE?

16th Jan '22 by Corringham

8 comments 679 reads

Hi All,

I have been doing back testing to see if I can find a better alternative to just sticking money into a passive index fund and just forgetting about it for 10-15 years.

Thought I would share my findings, and see if anyone has tried to back test anything similar, or has any suggestions or advice. Perhaps this might help people on their path looking to do something similar. There are a lot of investors on here with a wealth of knowledge so I would really appreciate any feedback or pointers anyone has. “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”.

I’m going to put my findings upfront on what I think is an optimum strategy, that should work in all-weather markets, as if you’re anything like me, I read the last page of a book first.

Strategy generates CAGR of 16.1% over the last 9.5 years vs 21.9% CAGR generated by a buy and hold QQQ over the same period.

BUY – Dollar/Pound Cost Average 10% of equity a day daily over a 2 week period into the QQQ (proxy US growth index) from day 1 of follow through day “FTD” as defined by Investors Business Daily/O’Neil. (DCA in over 6wks 1.4% worse, DCA 3wks 0.6% less CAGR).
FTD defined as - indexes decline by 8% plus, wait for first day that the market bottoms, if close is higher than 50% of that days range count that as day 1, otherwise next day that index goes up is day 1. Then ignore first 3 days, assuming the low is not undercut, a FTD occurs when either the Nasdaq or SPY close up at least 1.7% with volume at or above prior day.
If after 6 weeks no FTD occurs but indexes not undercut previous low, dollar cost average back into the market over 2 weeks (in 2016-17 the indexes drifted higher for 18 months without an official FTD).
SELL – drop of 8% OR break of the 200dSMA.
1 day delay on all transactions as wait for close of day to decide action. Stop loss put on low of violation day (means sometimes I didn’t sell out, which reduced some volatility).
When not in QQQ, sit in cash.
Additional potential return enhancement not factored into the 16.1%:
- In long bear markets will consider very safe low interest fixed income.
- I’ve not tested this…

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rpannell

17th Jan '22

You may be interested in Saltydog that follows a similar investment method - https://www.saltydoginvestor.c...

Corringham

Thanks rpannell, had a quick scan of their site, approach is similar to Gary Antonacci's dual momentum approach except it goes down a few levels into sectors. Looks like their review period is only 5 years, and I can't imagine there is any immediate downside protection with their strategy, I'd also expect there to be a lot of chopping in and out of sectors which would pull down returns. Their benchmark is the ftse100 also which has returned less than a 10th of the QQQ over the last 10years. Really appreciate the headsup, perhaps I'll try and mirror the same approach but over a longer period and see how the returns fair. Thanks again for kindly taking the time to share!

I have not spent too much time studying their method but my understanding is that it also is all about down side protection, i.e. you are never in the market during a severe down side. QQQ vrs FTSE100 - investing is all about the future. QQQ has done outstandingly well over the past 10 years. Like many others here, I suspect we all wish that we had only invested in the USA over the past 10 years. But what about the next 10 years?

I'm going to spend more time reviewing their approach. I do like the idea of alternating indexes based on their relative strength as it will get you into the best trending indexes over time. Thanks again

Just did a bit more digging, difficult to find their model portfolio returns as they're not freely advertised (I found they recently said they were up 80% over last 10years), CAGR over last 10 years is therefore 6.1%, although they beat their benchmark of the FTSE, given they had the whole world to choose from it's odd that it tracked a whole 10% behind the QQQ growth strategy I outlined above. They advertise their performance between 2010 and 2015 as being up by 50%.... The Nasdaq was up 163% over the same period... Tells me as per my option2, constantly changing products frequently kills performance. Worth further research for sure though!

pka

Hi Corringham, you wrote:

"I do like the idea of alternating indexes based on their relative
strength as it will get you into the best trending indexes over time."

The big attraction of using ETFs in a momentum trading strategy is low
transaction costs, because their bid-offer spreads tend to be small, and
there is no stamp duty to pay in the UK when buying an ETF. Another attraction (for me) is they are much less volatile than individual stocks.

If you want to try this, you might find the JustETF website useful. It allows one to rank ETFs by various criteria, such as past performance over 6 months or 1 year, or by "return / risk" over 1 year (by "risk" they mean volatility).

I've been experimenting recently with a fantasy portfolio of five ETFs, in which I use the ETFs' 1-year "return / risk" and 6 months past performance as the main selection criteria. Every few months, I sell any ETF in the portfolio whose performance, according to the above criteria, has dropped significantly. I reinvest the proceeds in another ETF that is chosen in the same way. I've restricted the ETFs in this portfolio to those from iShares, because otherwise I would be likely to select similar ETFs from different providers, which would reduce the diversification of the portfolio, and ETFs from iShares cover a wide range of types and markets and are easy to trade in the UK. I haven't been running this fantasy portfolio for long enough to come to any conclusions about whether this approach is likely to be profitable in the long run.

18th Jan '22

Hi pka, many thanks for your comments, I'm going to give this further consideration. I'd really like to backtest it, which I could do manually which will take some time, or perhaps I can use a tool like ETFReplay. How many ETFs are you holding and in what weighting? I think whatever I test is going to come up short to a Nasdaq historical return, but I guess the point is we don't know what is going to be the best performing index in the next 10-15years, and this strategy takes care of that. From my testing of just 4 products, I found there is a balance between frequency of review, and relative strength review period, to avoid chop. My suspicion (although not tested), is that the more optionality you build in, there will be a point at which returns diminish (which could explain Saltydog's performance). Further points to consider would be a stop loss to avoid a quick sharp drawdown that is not a Vshapped recovery... And I'd be interested to see how it does during a sideways choppy market, as I expect this would only work well when global markets are trending either direction....

Hi Corringham, I have 5 ETFs in my fantasy portfolio, initially equal weighted. If one ETF grows in value significantly more than the others, I would consider rebalancing the portolio towards equal weighting.

I think SaltyDog uses very short-term periods of a few weeks in its selection criteria, which might explain its performance record. There's another website called FundExpert which uses a six month past performance and review period to select funds for its momentum portfolios - you might find it interesting to look at that website.

I think a very easy way to use ETFs in a momentum portfolio is to buy and hold the iShares Edge World Momentum Factor UCITS ETF (code name IWFM), which has a very good performance record over several years and is well diversified globally. It revises its portfolio every six months, but it also changes its portfolio in periods of high market volatility, which means it has an element of dual momentum in its strategy, even though it stays invested fully in equities during bull markets.

LONG TERM PASSIVE INDEX INVESTING NASDAQ optimised using MOMENTUM TRADING strategy. THOUGHTS VERY WELCOME PLEASE?

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Corringham

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