Recessions: investing and detection

Viewing the system equity curve and markets in general during recessions, it is clear that returns are low or even negative during these periods.  Therefore monitoring economic expansions and contractions using proven tools can be very worthwhile.

One such tool is RecessionAlert.  The following chart and table verify the usefulness of this approach.  The market is capable of sustained falls during recessions and therefore turning points marked by breadth may not hold (see breadth page).

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Note that average annual return outside recessions is 9%.  Average return during recessions is significantly negative.

Momentum Investing: more research

Gary Antonacci (2012 NAAIM winner) publishes a momentum index monthly, which has averaged 15% annually since 1984.  [note however: bonds have been in a bull market throughout this period].

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Macquarie has tested their adaptation of Antonacci’s momentum model:

Each month, the strategy rotates into the 2 best performing funds over the previous 6 months.  Average annual returns since 2003 are above 20% (note these results are backtested).

Momentum Investing: strategy testing

Following identification of a robust market anomaly (momentum), a set of rules is defined and tested:


This strategy will be “long only” (i.e. no shorting) and trade on a weekly basis.

Buying is at the weekly closing price when percentage of stocks up 25% in one month exceeds percentage of stocks down 25% in one month:

(in Amibroker code):

Buy = Cross (25%u, 25%d);

And vice versa for sell:

Sell = Cross (25%d, 25%u);


Various momentum ranking methods will be tested, the Amibroker ranking term is “Positionscore”:

  1. Annual rate of price change, ROC (C,52)
  2. Worden TI42, C / MA (C,8) [i.e. 8 week moving average or 42 trading days]
  3. Price change from annual low, MA (C,4) / LLV (C,52)

All available cash is used to buy the top ranked fund from the universe.  No stop losses are set.


(click to enlarge)

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The strategy performs well in bull markets, treads sideways in bear markets (2002, 2008) and has struggled since mid 2011.

The chart below shows breadth in the lower pane, market prices with green BUY markers and an equity curve (green denotes holding cash i.e. no current trade).

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A universe of Vanguard funds for back-testing

The following universe for testing was selected from a list of low cost funds from Vanguard.  This list was selected to have a reasonably long data history.  No other considerations were made.






Note that other funds may be substituted at the strategy tracking stage.

Momentum Investing: top research papers

One key concept in targeting robust out-performance is to use persistent and well-documented market anomalies as a starting point.  A set of trading rules (or system) is then built around that anomaly.  Some key research papers are listed below.

The presence of momentum in worldwide markets has been extensively documented:

Risk Premia Harvesting Through Dual Momentum, Gary Antonacci


Momentum is the premier market anomaly. It is nearly universal in its applicability. This paper examines cross-asset momentum with respect to what can make it most effective for momentum investors. We explore price volatility as a value-adding factor. We show that both absolute and relative momentum can enhance returns, but that absolute momentum does far more to lessen volatility and drawdown. We see that combining absolute and relative momentum gives the best results. Finally, we show how asset modules can serve as diversification building blocks that allow us to easily combine relative with absolute momentum and capture risk premia profits.

Time Series Momentum, Moskowitz

We document significant “time series momentum” in equity index, currency, commodity, and bond futures for each of the 58 liquid instruments we consider. We find persistence in returns for 1 to 12 months that partially reverses over longer horizons, consistent with sentiment theories of initial under-reaction and delayed over-reaction. A diversified portfolio of time series momentum strategies across all asset classes delivers substantial abnormal returns with little exposure to standard asset pricing factors and performs best during extreme markets. Examining the trading activities of speculators and hedgers, we find that speculators profit from time series momentum at the expense of hedgers.

Profitability of Momentum Strategies, Jegadeesh, Titman

This paper evaluates various explanations for the profitability of momentum strategies documented in Jegadeesh and Titman (1993).The evidence indicates that momentum profits have continued in the 1990′s suggesting that the original results were not a product of data snooping bias. The paper also examines the predictions of recent behavioral models that propose that momentum profits are due to delayed overreactions which are eventually reversed. Our evidence provides support for the behavioral models, but this support should be tempered with caution. Although we find no evidence of significant return reversals in the 2 to 3 years following the following formation date, there are significant return reversals 4 to 5 years after the formation date. Our analysis of post-holding period returns sharply rejects a claim in the literature that the observed momentum profits can be explained completely by the cross-sectional dispersion in expected returns.


Various momentum measures may be used to select funds from the universe:

  1. Annual rate of price change (52 weeks), ROC52
  2. Two month momentum (42 days), TI42 (from Worden database)
  3. Move from annual low, C / Low(C,52), where C is current price close.

Results of momentum combined with other data will be shown in later posts.

Market Breadth

Market breadth is a measure of the number of stocks moving with the market averages.  A move involving the majority is typically more robust than one in which a few heavily weighted stocks lift the averages.  The former is reflective of wide spread institutional activity in the market.

Various measures of breadth may be used:

  1. Percentage of stocks above 50 day moving average
  2. Bullish percent index (percentage of stocks on PnF buy signals)
  3. Percentage of stocks up 25% in one month

Stockbee has a very detailed primer on market breadth here: