Thursday, August 13, 2015

Momentum versus Mean Reversion....A Case Study.....08.13.15

Traders often struggle when attempting to figure the advantages of momentum versus mean reverting market strategies.  Here's a comparison of the two approaches using our Schwab no-fee portfolio model + XLU (SPDR sector Utilities ETF...not no fee). SCHB is a proxy for SPY, SCHX is a proxy for the NYSE large caps. SCHH is a REIT proxy and SPLV is the S&P low volatility ETF.,
Just to compare apples to apples we've using a 4 day positive momentum algorithm for the MM (momentum model) and a 4 day pullback algorithm for the MR (mean reverting model).
We rotate positions at the close of each day and apply a .6% limit stop at that time.
The results span a 2 year lookback period and may be surprising to many given the strong market momentum we have seen during that period.  The mean reverting model produces superior results in terms of linearity and max drawdown although short term returns lag a bit. Obviously the 2 models have entirely different views of market opportunities as can be seen by looking at the rankings of each model.
What's interesting is that we can generate a fairly reliable revenue stream using either one.