Killing the Market With Momentum

Dec. 2, 2024

A lot of smart people have said that we can beat the market easily by using momentum.

Perry Kaufman is one of the famous people who believe in it but there has been a ton of research by many others.

And by “momentum”, we simply mean “buying things that have already gone up”.

There are academic articles on the persistence of upward prices and the entire trend following methodology is based on that timeless principle.

But there is a catch, especially for stocks.

You can’t just buy something forever. Well, you can, but it’s dangerous.

No, the way smart people do it is to buy something that’s gone up…and then rotate out of it when the momentum is gone.

Or when another stock’s momentum is greater.

This idea has always resonated with me and so, after years of pondering and watching, I decided to start actually tracking a momentum portfolio.

The problem is that there are a lot of ways to track momentum. Is it simply price action? An indicator? Relative strength?

Probably any of those would work.

But I chose Rate of Change. I want to know what’s been charging upward most rapidly, and I want to ride the momentum of those stocks. Rate of Change is a good way to do that.

So here’s what I did.

I created a scan in Tradestation using Rate of Change. Then I run the scan once a week when the market’s closed. Then I chose the top 12 stocks with the highest Rate of Change.

Are there other, possibly better, ways to do it? Almost certainly.

But I wanted real-life evidence of it working.

Or not working.

The first time I did it was back on 9/3/24. That was when I started with the original 12 stocks.

If a stock fell out of the top 20, it was replaced by the highest-ranking stock on the list. But as long as a stock remained in the top 20, it stayed in the portfolio.

Has there been a lot of turnover? Yes. Sometimes many stocks get removed if the market turns down or stocks run out of steam.

But sometimes there’s no change at all. For example, the current portfolio has been in place for three weeks now.

How has it done?

It’s killed the market. Here’s what the momentum portfolio has done since 9/3/24 (using equally-weighted positions each time):

And here’s what SPY has done:

Momentum has beaten it by quite a bit for a fairly short amount of time.

And here’s the current portfolio:

It seems like momentum does indeed work. I know it’s only a few months, but the research goes back decades. And to see corroboration in a short time does build confidence.

Do I like this sort of trading?

Hmm.

As I’ve said, I’m obsessed with not losing. I can’t stand an asset not paying me back immediately and indefinitely.

But by using a rotation, it has a chance to create winning from the start because it’s trying to always have momentum on its side.

If this is interesting to you, let me know. I can talk more about it and/or possibly add it into the Dividend Income Program in some way.

If it’s not interesting, I’ll be back next week with something else.

Talk soon.

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Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.