The power of momentum coupled with a recession filter

STRATEGY:

1) Filter out recession dates using RecessionAlert real-time model.

2) Fund universe: FATEX, FBTTX, FDXAX, FEIRX, FLSTX, IBB, IYR, IYE, IYW.

3) Fund selection: highest 52 week ROC, single position.

4) Exit using simple breadth condition (see code below) or 6x ATR profit stops.

RESULTS:

Annual return (2003-2013): 36% (including 20% of time in cash)

Max. drawdown: 13%

# trades 23, Sharpe 1.5

blog figs

Trade history:

Ticker Trade Date Price Ex. date Ex. Price % chg
IBB Long 3/21/2003 51.41 4/4/2003 52.29 1.71%
IBB Long 4/11/2003 49.54 5/30/2003 67.09 35.43%
FLSTX Long 6/6/2003 13.89 6/20/2003 14.22 2.38%
FLSTX Long (profit) 7/3/2003 14.2 11/7/2003 17.13 20.63%
FLSTX Long (profit) 11/14/2003 16.78 1/23/2004 19.93 18.77%
FLSTX Long (profit) 1/30/2004 19.21 2/25/2005 24.67 28.42%
FLSTX Long (profit) 3/4/2005 24.8 5/5/2006 30.72 23.87%
FLSTX Long (profit) 5/12/2006 29.45 4/5/2007 33.65 14.26%
FLSTX Long (profit) 4/13/2007 34.25 7/13/2007 38.82 13.34%
IYW Long 7/27/2007 57.62 9/28/2007 60.96 5.80%
IYE Long 10/5/2007 40.62 10/19/2007 40.32 -0.74%
IYE Long 10/26/2007 41.29 1/4/2008 42.05 1.84%
FLSTX Long 3/13/2009 14.24 5/8/2009 20.96 47.19%
IYR Long 5/15/2009 26.65 6/26/2009 28.1 5.44%
FLSTX Long 7/2/2009 20.16 8/28/2009 24.43 21.18%
IYR Long (profit) 9/11/2009 36.2 2/11/2011 54.98 51.88%
FDXAX Long 2/11/2011 12.84 3/4/2011 12.84 0.00%
IYE Long 3/4/2011 43.4 7/29/2011 42.55 -1.96%
IYE Long 8/19/2011 35.31 11/11/2011 40.27 14.05%
FBTTX Long 12/2/2011 7.92 2/17/2012 9.43 19.07%
FBTTX Long 2/24/2012 9.43 7/6/2012 10.83 14.85%
FBTTX Long 8/10/2012 10.59 8/31/2012 10.89 2.83%
FBTTX Open Long 9/7/2012 11.23 3/1/2013 12.35 9.97%

Amibroker code:

PositionScore = ROC(C,52);

Buy = r_filt ; Sell = Cross(u4%,u25%); // breadth condition (red dots in above plot)

ApplyStop(stopTypeProfit,stopModePoint,6*ATR(15) );

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13 thoughts on “The power of momentum coupled with a recession filter

  1. Looking good, but let me ask: What is the “recession filter” based on–is it the NBER dates, which are announced retrospectively (this will introduce a look-ahead bias)?

      • For testing, I blank out the dates when the recession model is above the threshold e.g. take signals before 12/31/2007 would be:
        Buy = Datenum() < 1071231 AND … (system logic)

        In actual trading I would close trades when the threshold is hit and stay in cash until the all clear (the dates are in the recession post table, taken from a post on the recessionalert blog)

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  3. Very interesting analysis and impressive results. Can you help understand the following?

    Sell = Cross(u4%,u25%);

    Also, there is a trade on 3/13/2009 even though table in recession alert post shows 6/30/2009 as the date coming out of recession. The recession alert table does not seem to match the actual trades. Is there a reason? Thanks a lot.

    • Sure, most of the concepts come from stockbee including breadth: http://stockbee.blogspot.ca/2011/08/how-to-use-market-breadth-to-avoid.html
      u4% = number of stocks up 4% in a day
      u25% = number of stocks up 25% in a month
      There is scope to improve exits. This one just acts as a trigger to make the next trade, for the “always-in” case. The returns come from the twin engines of momentum and recession filtering. You may have spotted a valid mismatch on the dates; although the equity curve is so linear that %return and sharpe are similar everywhere. Stay tuned for an upcoming out-of-sample post.

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