Dual momentum without the benefit of the bond bull market

Dual momentum, popularized by Gary Antonacci, uses 12 month returns to:

  1. rank and select the top asset (RELATIVE)
  2. shelter in a safer asset if the absolute value falls below a threshold (ABSOLUTE)

Many tactical strategies use bonds as the safer asset which enhances returns in two ways.  Firstly, returns tend to be uncorrelated with stocks and secondly, bonds have risen continuously over the past 3 decades.

Here is the result using a single risky asset (S&P 500) and Long Term Treasury Bonds (data from yahoo).  Clearly, relative momentum is not used in this case.  The lower return threshold triggering a switch into bonds is the 12 month bond return.

Dual2

Equity curve is in blue and 12 month rolling return in green.  Average compound return is 9.7% since 1987 using the full dataset.

Notice the flat to negative return from 2009 through 2011.

————————————–

Now, remove the underlying bond trend by subtracting the average return (0.71%) from each monthly data point and recalculate:

Dual3

Compound return falls to 8.3% but the majority occurs pre-2000.

This test could be performed various ways but the result above is a possibility for this type of strategy when interest rates start to rise.

NEXT WEEK: a solution.

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6 thoughts on “Dual momentum without the benefit of the bond bull market

  1. Pingback: The Whole Street’s Daily Wrap for 1/22/2015 | The Whole Street

  2. I think the truth will be somewhere between case 1 and 2 in your example. It is true that bond yields will rise SOME time in the future, but if you study the correlation between long duration bonds and the equity market you will often see a quite negative correlation. That is, you don’t need a high starting point for the bond yields to generate positive returns from these in times when the equity markets fall.

    • Yes if negative correlation is the main driver rather than trend. What is the result of using a perfect negatively correlated asset (-SPY or SH or 0.5*SH)?

  3. Pingback: Dual momentum without the benefit of the bond bull market | XLNtrading

  4. Pingback: Dual momentum with Value and Momentum factor portfolios | RRSP Strategy

  5. Pingback: Dual momentum with Value and Momentum factor portfolios | RRSP Strategy

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