Saturday, November 17, 2018

Stock Market Momentum - Part 2

Rules & Implementation


I made some small changes:





Backtest Results


Looking at monthly returns:



Trading It


  • Think 'Next 1000 trades'.



Friday, November 9, 2018

Stock Market Momentum - Part 1

I'm looking at a systematic, momentum-based stock market strategy.  Why?
  • The existence of momentum in markets is proven by numerous academic studies.
  • The system I have gives a nice CAGR 14-20%, over 10-15 year periods.
  • I will be buying stocks that have gone up.  Completely different from the value stocks I normally buy.
  • I want to be able to trade the markets systematically, without having an opinion. 

What is Momentum?

From academic studies, stocks that have gone up in the past 6-12 months are statistically likely to go up in the next 1-2 years 1.  Most papers use similar methods to measure momentum, for example:

  • Value and Momentum Everywhere: Found evidence of momentum worldwide in stock markets, stock indexes, currencies, bonds, and commodities.  For stocks specifically: they selected large, liquid stocks from 4 markets over nearly 40 years.  Stocks' momentum was ranked by their past 12 month return, skipping the latest month.  They were sorted into 3 equal sized groups: Lowest momentum, Medium momentum and Highest momentum.  And re-balanced monthly.  The Highest momentum group outperformed the Lowest by 5.4% (US market), 6% (UK), 8.1% (Europe) and 1.7% (Japan).   
  • 212 Years of Price Momentum: Looked at US market from 1801 to 2012.  Same methodology as above.  The Highest Momentum group outperformed the Lowest one by around 4% a year.

Why does Momentum occur?

No one knows.  There are many papers arguing whether its due to 'risk factors' 2, or behavior.  I think its behavior.  Humans are herd animals.  Once we see other people doing something, we want to do it too:
  • Fads and Fashion.  Whether its primary school children playing, or women comparing handbags, how often have we seen some trend catch on, then grow in popularity, until everyone 'has one'?  At which point they become not cool anymore, and the cycle starts again.  Look at the stock charts of Crocs or Michael Kors for example. 
  • Capex Cycle: For mining and heavy industry, it takes years to bring new capacity online, so they respond slowly to increased demand, while the price of their commodity/product shoots up over several years.  At the end of the cycle, prices are sky high and everybody is prospecting/investing.  Leading to oversupply and a crash.  Look at Rio Tinto's stock chart for example: up 7 times from 1999 to 2008, then losing all of that in 2009.
  • Success begets success: As business become bigger and stronger, they entrench their position, leading them to become bigger and stronger.  Especially prevalent in technology, with winner-take-all network effects, like with Microsoft or Facebook.  Until someone new comes along, disrupting the market, and the cycle starts again.

Why is it still Profitable?

How can such a simple, dumb, and well known strategy - buying stocks that have gone up - still make money?  Shouldn't everyone be doing it, removing its effects from the market?

Momentum strategies are hard to follow.  They have long and hard drawdowns: a 30% loss every few years is normal.  50-60% losses occasionally occur (the 1929 great depression and the 2000 tech wreck).  And there are long periods...a year or more... of sitting around doing nothing.

There's an interesting presentation by Wes Grey on why Momentum still works.  He considers that, for most fund managers, there is too much career risk in following momentum strategies.  I especially like his 'God Portfolio' (33:00 to 37:00) - not even God can prevent drawdowns!

In the next post I'll look at the system I'm using, and what its like to trade it.

1 Not true for shorter or longer time frames: if we're predicting under one year into the future, or from two to five years, then stock prices tend to mean-revert.
2 i.e.: stocks that posses momentum have higher returns to compensate for being riskier.

Monday, November 5, 2018

Sold most of my stocks

Sold most of my stocks last week.  Just before the rebound : (

Reason was because both the S&P500 and Nasdaq Composite index fell convincingly below their 200 MA.

I still think there's a only a 1/3rd chance of a bear market - most likely this is a 10-20% correction.  But I don't want to take the chance.  If you think there's a 1/3rd chance of getting shot, you have to take action to prevent yourself getting shot.

The stocks I am holding now fall into three groups:
  • Stocks I am willing to hold for 10 years.  Buffet style.
  • Small speculative positions, where I don't mind losing the lot.  Small risk for big gains.
  • A market-neutral pair trade.

I'm spending my time developing a simple automated trading system.  I want to be able to trade the market without having a view.

Tuesday, August 21, 2018

Bought Yangzijiang Shipbuilding

Yangzijiang is a shipbuilder, which builds dry bulk and container ships.

Why am I buying?

The shipping industry has come through a massive 6-year downturn.  Dry Bulk is recovering - the main supply-side metric is the order book: estimated at 10% of the fleet 1, 2.  Containers have stopped collapsing: there may be a recovery in the smaller class ships (Post Panamax and below), while large container ships (New Panamax & UCLV) still look pressured by new supply - however - in the long term supply will be managed by the 3 major shipping alliances3.

Yangzijiang has been profitable through the downturn:
              (source: Morningstar)

Since building a ship is a long term endeavour, earnings numbers contain many assumptions (eg: currencies, steel costs).  I do not know enough to look at this.  But write offs have already been made:
  • Yangzijiang made Rmb1.2bn worth of provisions in 4Q17 in view of the weaker USD and rising steel cost then. We note that ~70 vessels (out of total of 123 vessels) on its orderbook were provided for while the remaining 40+ vessels (largely the large containerships and small bulkers) were expected to be profitable when stress-tested at those levels.
         (Source: DBS Research report, May 2018)

Lastly, the stock is cheap.  Its trading just above its net cash is of 91c.  Most of its cash is short-duration 4 Hold-to-Maturity (HTM) investments.

Why is the stock trading so low?  Probably because of the feared effect of the trade war on the shipping industry.

Bought 8000 shares @ SGD 1.08.  Thats a 1% position.  I'd be willing to go up to 2% for an S-chip.

Edit: 12th Sep 2018: Bought another 7000 shares at $1.11 on 31st Aug.

2 Up to 15% is reasonable. 
4 1-3 years.

Sunday, July 22, 2018

Uranium Again

A few weeks ago, I sold my URA ETF due to changes in its constituents.  Took a loss of USD 1650.

To replace this, I have bought directly into Cameco, and a bucket of small uranium companies.  This makes up around 3% of my portfolio.

Wednesday, May 30, 2018

Bought Offshore oil companies



Friday, May 11, 2018

Bought Cardinal Health (CAH)

