Momentum telltale chart?

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hungrywave
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Momentum telltale chart?

Post by hungrywave » Tue Jun 11, 2019 7:35 pm

Dear BogleBlasphemers,

Larry Swedroe discusses a number of studies supporting the persistence of the trend-following (time series) momentum factor.

Do we have a telltale chart for momentum so I can see it for myself?

(This would be especially useful if the momentum illustrated is similar to that of the Vanguard U.S. Momentum Factor ETF (VFMO), in which I am considering investing.)

I don't believe momentum is available through Simba's backtesting spreadsheet. https://www.bogleheads.org/wiki/Simba%2 ... tale_chart

:sharebeer

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siamond
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Re: Momentum telltale chart?

Post by siamond » Tue Jun 11, 2019 9:24 pm

hungrywave wrote:
Tue Jun 11, 2019 7:35 pm
I don't believe momentum is available through Simba's backtesting spreadsheet. https://www.bogleheads.org/wiki/Simba%2 ... tale_chart
Actually, it is, check the MTUM data series. Here are the data sources:
- MSCI USA Momentum GR USD 1982-2013 (which is the index tracked by MTUM)
- iShares Edge MSCI USA Momentum Factor (MTUM) 2014+

Personally, I am quite a skeptic about such approach, but the historical performance (compared to TSM) is actually quite impressive.

Random Walker
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Re: Momentum telltale chart?

Post by Random Walker » Thu Jun 13, 2019 9:18 am

siamond wrote:
Tue Jun 11, 2019 9:24 pm
Personally, I am quite a skeptic about such approach, but the historical performance (compared to TSM) is actually quite impressive.
This is what fascinates me about momentum. I am a very strong believer in market efficiency, and momentum is purely behavioral. So my natural inclination is to not have much faith in it. At some point though, one has to believe the data. It’s strong for both CS Momentum and TS Momentum.

Dave
Last edited by Random Walker on Thu Jun 13, 2019 11:30 am, edited 1 time in total.

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willthrill81
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Re: Momentum telltale chart?

Post by willthrill81 » Thu Jun 13, 2019 9:22 am

Random Walker wrote:
Thu Jun 13, 2019 9:18 am
siamond wrote:
Tue Jun 11, 2019 9:24 pm
Personally, I am quite a skeptic about such approach, but the historical performance (compared to TSM) is actually quite impressive.
This is what fascinates me about momentum. I am a very strong believer in market efficiency, and momentum is purely behavioral. So my natural inclination is to not have much faith in it. At some point though, one has to believe the data. It’s strong for both CS Momentum and CS Momentum.

Dave
I wonder why so many here put so much faith in market efficiency. The EMH certainly explains a lot of what we see in the markets, but it certainly doesn't explain all of it, and there is certainly data that runs counter to it. I'm not saying that it's a good working hypothesis, but it's just a hypothesis, and like all models, we know that it's not strictly accurate.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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siamond
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Re: Momentum telltale chart?

Post by siamond » Thu Jun 13, 2019 10:31 am

willthrill81 wrote:
Thu Jun 13, 2019 9:22 am
Random Walker wrote:
Thu Jun 13, 2019 9:18 am
This is what fascinates me about momentum. I am a very strong believer in market efficiency, and momentum is purely behavioral. So my natural inclination is to not have much faith in it. At some point though, one has to believe the data. It’s strong for both CS Momentum and CS Momentum.
I wonder why so many here put so much faith in market efficiency. The EMH certainly explains a lot of what we see in the markets, but it certainly doesn't explain all of it, and there is certainly data that runs counter to it. I'm not saying that it's a good working hypothesis, but it's just a hypothesis, and like all models, we know that it's not strictly accurate.
The EMH makes very little sense to me and this isn't the reason for my skepticism. But in all fairness, when I ran a quick couple of charts with Simba, my eyes opened a bit wider... First chart is an initial investment growing over periods of 10 years and varying the starting year. Second chart is an annual (inflation-adjusted) investment over periods of 20 years. I now wish the MSCI index had been extended to the 60s and 70s... :o

Image

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siamond
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Re: Momentum telltale chart?

Post by siamond » Thu Jun 13, 2019 12:17 pm

While I am at it, I looked at drawdowns and the Telltale chart (the OP's question!). Here they are, using the corresponding Simba tools.

Image

It is interesting to see that momentum didn't display much of a premium in the first 15 years (was the momentum effect dead before it was born? :wink:). I was also quite surprised by the drawdown chart, I thought momentum supporters reported that one of the beauties of momentum is that it works whether stocks go up or down. Well, this clearly didn't work that way, at least with the way the MSCI USA Momentum index is defined.

I was actually so surprised that I took the monthly values of MSCI USA GR USD index and the MSCI USA Momentum GR USD index (without applying any ER, nor splicing with real-life funds) and uploaded them in PortfolioVisualizer and checked the drawdown chart. The result is much more fine-grain, of course, but the overall conclusion is the same.

Image

klrjaa
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Re: Momentum telltale chart?

Post by klrjaa » Fri Jun 14, 2019 6:16 am

As shown by Allocate Smartly, momentum funds don't perform nearly as well as hard and fast TAA strategies, all of which use only very liquid ETFs. In fact, the MTUM ETF itself is only used in a handful of the TAA strategies, mainly faber.s https://allocatesmartly.com/comparing-t ... trategies/ This AS blog entry was in response to another study.

Momentum works over a variety of time series, and most TAA strategies use relative and absolute momentum with mechanical buy sell signals. What's most effective is combining strategies which produces a very dramatic improvement of return vs drawdown, way reduced max drawdown, massive improvement in time to recover, reduced volatility, etc. The hunt for a single momentum approach is barking up the wrong tree; it's not diversified enough. And differences in approaches (vs 60/40) are readily apparent from the get go when viewing a logarithmic scale over periods in 1970. The measured period from 14 to 19 as referenced in AS is too short a period to bank any decisions on, which is why I'd go with a combination of tried and true TAA long history strategies vs any of the new pure momentum etfs

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hungrywave
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Re: Momentum telltale chart?

Post by hungrywave » Wed Jun 19, 2019 12:55 pm

siamond wrote:
Thu Jun 13, 2019 12:17 pm
While I am at it, I looked at drawdowns and the Telltale chart (the OP's question!).
Thank you so much, siamond! I'm sure the effect will be fully arbitraged now that my naive self has entered the game... 8-)

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willthrill81
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Re: Momentum telltale chart?

Post by willthrill81 » Wed Jun 19, 2019 3:03 pm

siamond wrote:
Thu Jun 13, 2019 12:17 pm
While I am at it, I looked at drawdowns and the Telltale chart (the OP's question!). Here they are, using the corresponding Simba tools.
Thanks for the analysis, Siamond. What data source was used for MTUM? Is it cross-sectional momentum or time-series momentum? What are the defined parameters for momentum?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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siamond
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Re: Momentum telltale chart?

Post by siamond » Wed Jun 19, 2019 4:41 pm

willthrill81 wrote:
Wed Jun 19, 2019 3:03 pm
Thanks for the analysis, Siamond. What data source was used for MTUM? Is it cross-sectional momentum or time-series momentum? What are the defined parameters for momentum?
Will, don't you know that the data sources for the Simba backtesting spreadsheet are carefully documented in the spreadsheet itself? :wink:

Ok, I'll be nice and give the answer:
- MSCI USA Momentum GR USD 1982-2013
- iShares Edge MSCI USA Momentum Factor (MTUM) 2014+

The iShares tracks the MSCI index, so if you want to find details about the exact momentum algorithm (CS, TS or else), you need to go check the MSCI methodology documents (check this link)... I do not know the answer to that off the top of my head.

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willthrill81
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Re: Momentum telltale chart?

Post by willthrill81 » Wed Jun 19, 2019 4:49 pm

siamond wrote:
Wed Jun 19, 2019 4:41 pm
willthrill81 wrote:
Wed Jun 19, 2019 3:03 pm
Thanks for the analysis, Siamond. What data source was used for MTUM? Is it cross-sectional momentum or time-series momentum? What are the defined parameters for momentum?
Will, don't you know that the data sources for the Simba backtesting spreadsheet are carefully documented in the spreadsheet itself? :wink:

Ok, I'll be nice and give the answer:
- MSCI USA Momentum GR USD 1982-2013
- iShares Edge MSCI USA Momentum Factor (MTUM) 2014+

The iShares tracks the MSCI index, so if you want to find details about the exact momentum algorithm (CS, TS or else), you need to go check the MSCI methodology documents (check this link)... I do not know the answer to that off the top of my head.
Honestly, I've never looked at the Simba spreadsheet because I've had no perceived need to do so. I suppose that I should now. Thanks!
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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