Crashless Momentum - An Update

Three months of High-To-Price (HTP) Momentum Strategy

Dec 25, 2021

Three months ago, we had setup a momentum strategy that promised to avoid crashes.

Momentum strategies have given outsized returns in India. However, the naïve, monthly-rebalanced portfolios have punished investors with +50% drawdowns every 3-4 years. It is this crash risk that keeps most investors away from the momentum style of investing…

3 years ago · 1 like · 4 comments · Shyam Sunder

Since then, the markets made their all time highs and corrected about 10-12% from there.

Select Indices, October 2021 ~ December 2021

Over the same period, the HTP Momentum strategy beat out its peers.

HTP vs. ATH vs. Momo Velocity vs. Momentum

Most of this out-performance is attributable to HTP maintaining a frustratingly high cash level that currently stands at a whopping 64%

There is a risk vs. returns vs. costs tradeoffs here that is worth contemplating:

A “fast” strategy, like Momo Velocity, will react strongly to market downturns and switch to cash at the slightest sign of risk. This increases costs but saves your skin if the market continues to tank. It also allows you to invest in riskier stocks (midcaps, for instance) and reach for higher returns.
A “slow” strategy, like All Stars (ATH), will switch out to cash only after it takes the first downdraft in the markets squarely on the chin. Also, it is unlikely to get back into the market during the initial stages of a recovery. It will, however, avoid long bear markets, preserving capital. The tradeoff here is that costs are low if you stay committed over multiple market cycles.
HTP, with its large cash allocation and slow formation cycles, looks like it is sort of in-between the two. Any strategy that is largely in cash during market drawdowns but is able to ramp back in before durable uptrends is bound to out-perform both high-cost momos and low-speed ATH.

It will be interesting to see how the next few months work out for these strategies.

Markets this Week

Indian indices went nowhere this week. Lots of churn though. US, meanwhile, on another planet.

Links

Why does Red Bull own an F1 team? (Twitter)

Apache Log4j bug: China’s industry ministry pulls support from Alibaba Cloud for not reporting flaw to government first. They had reported it first to the Apache Software Foundation. (SCMP)