Journal of Technical Analysis - Market Technicians Association

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Allocation and Average Return of Selected Style Indexes Each of the six 12,1 portfolios’ allocation (Panel A) and contribution to returns (Panel B) of the six Russell indexes are reported in Exhibit 5. For the top performing portfolio, and for all 12,1 portfolios, the largest allocation was the SV at 34.1%. This means that SV had the largest prior 12 month performance 34.1% of the time and was therefore held in the 12,1 portfolio 34.1% of the 34 year period analyzed. The SV was also the highest performing style index over the 34 year period analyzed, but was not the leading average return contributor to the 12,1 portfolio performance. The largest contributor was MG, followed by SG, LV, then SV, with average monthly returns of 2.11%, 1.97%, 1.78%, and 1.69%, respectively. This indicates that the momentum exhibited is not simply a SV phenomenon. For the bottom performing 12,1 portfolio the largest allocation was the LG at 32.8% and the smallest was the MV at 3.7% with average monthly returns of 0.11% and 0.70%, respectively. Persistence Through Time of 12,1 Portfolios To succinctly show that the 34 year period results are not solely driven by a particular time period and are robust through time we report the top, bottom, and Long-Short 12,1 portfolios in Exhibit 6 (on page 54). Top is the 12,1 portfolio with the highest formation period performance, bottom is the 12,1 portfolio with the lowest formation period performance, and Long-Short is the difference. On an annualized return basis the returns for the periods analyzed vary from 3.08% to 13.71%, depending on the period analyzed, and averaged 9.25%. If you exclude the two largest return periods from ’72 to ’80 the Long-Short portfolio still returns an annualized 5.08%. On an individual calendar year basis, not reported for brevity, the worst Long-Short portfolio return was -20.35% in 2000 and the best was 50.11% in 1999. Average Holding Period To further evaluate the momentum persistence we analyzed the average holding periods of the top and bottom 12,1 portfolios. Even though style indexes were analyzed on a monthly basis for reshuffling, on average, reshuffling was only required about twice a year. The top and bottom positions are held for an average of 5.65 and 6.10 months, respectively. Interestingly, the LG had the longest holding period for both the top and bottom position. The bottom position was for 26 months from March 1976 to April 1978 and the top position was for 24 months from May 1989 to April 1991. The relatively infrequent need for rebalancing when combined with the low cost of exchange traded funds supports the viability of this momentum trading strategy. Conclusion Style index momentum is particularly interesting since it provides a diversified, low-cost trading strategy to exploit it. This inexpensive and diversified option provides the opportunity for money managers, regardless of the amount of assets under management, to include such strategy into their tactical asset allocation decisions. Such style index momentum trading strategies have outperformed on both a raw and risk-adjusted return basis, with the long minus short portfolio generating an average 9.25% annual return over the 34-year period analyzed. Although the excess returns vary, they are robust through time and after controlling for potentially confounding effects. Jo u r n a l of Technical Analysis • 2008 • Issue 65 53
54 Sharpe ratio is calculated as follows: Treynor ratio is calculated as follows: Jensen’s alpha is calculated as follows: Where: AR = average annualized return on portfolio i i AR = average annualized return on the one month Treasury bill rf σ = standard deviation of portfolio i i = beta for portfolio i β i Appendix Jo u r n a l of Technical Analysis • 2008 • Issue 65
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® Professionals Managing Market Ri
Page 3 and 4: 2 Julie Dahlquist, Ph.D., CMT Unive
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Page 7 and 8: 6 Roll of the Dice Let us compare t
Page 9 and 10: 8 Chart 1 Chart 2 displays an arrow
Page 11 and 12: 10 We have displayed the right tail
Page 13 and 14: 12 Technical Analysis Redefined Com
Page 15 and 16: 14 Appendix 3 All Signals Listed Jo
Page 17 and 18: 16 Appendix 5 Jo u r n a l of Techn
Page 19 and 20: 18 Acknowledgement All charts have
Page 21 and 22: 20 Chart 1 VPC = VWMA- SMA short-te
Page 23 and 24: 22 It’s important to note when us
Page 25 and 26: 24 is an uneven match. The VPCI use
Page 27 and 28: 26 Inferring Trading Strategies Fro
Page 29 and 30: 28 Because the turning points have
Page 31 and 32: 30 Annualized performance of the tr
Page 33 and 34: 32 Conclusions The PDF has been sho
Page 35 and 36: 34 About the Author John Ehlers is
Page 37 and 38: 36 Rotational Trading Rotational tr
Page 39 and 40: 38 Figure number two is a profit di
Page 41 and 42: 40 Figure 4 plots a weekly comparat
Page 43 and 44: 42 Ichimoku Kinko Hyo Véronique La
Page 45 and 46: 44 The position of the market relat
Page 47 and 48: 46 Finally, due to a much larger ti
Page 49 and 50: 48 Figure 11: Tk4, example on coppe
Page 51 and 52: 50 Using Style Momentum to Generate
Page 53: 52 Performance of 12,1 Style Index
Page 57 and 58: 56 Benner’s Prophecies of Future
Page 59 and 60: 58 2 [Ed. note… Giving Benner plu
Page 61 and 62: 60 2009 Charles H. Dow Award The co
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