The Day Momentum Died [Premium Articles]

The day momentum died, mean-reversion was born. Now they have both merged into what I call momersion.

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6 Responses to The Day Momentum Died [Premium Articles]

  1. Mark Leeds says:

    Hi Michael: It's interesting what you wrote and you expressed everything simply and clearly. But if I understand correctly, you just considered the 1 day autocorrelation. There's no reason to think that other timeframes won't show other behavior. Whether it's week to week or hour to hour, you probably will get something altogether different if you do the same kind of analysis. Still, a neat way and clear way to think about reversion versus momentum. Thanks. I really like your blog.

    • Hello Mark,

      This is a good point. Actually, the 1-lag (1 day) autocorrelation shows whether positive daily returns are most likely to be followed by more positive daily returns and negative by negative, in the time period considered. If you increase the lag to 2, the autocorrelation is mostly destroyed and becomes random. This is because you are expecting returns to have longer memory. As you increase the lag to 5, for a period of 250 returns, the general trend does not change but you get more variation. You will also notice that periods of sustained negative correlation increase after 2000. For example, for 30-lag, the period increases to two years while positive autocorrelation lasts for less than a year. But If you are increasing the lag, then you are not looking at momentum or mean-reversion properties in price series any longer but instead you are curve-fitting the autocorrelation model to the data, essentially introducing hindsight bias in the analysis.

      As you correctly point out one can apply autocorrelation to returns in all timeframes but then one also needs to find a good explanation of what the results mean in the context of the patterns they exhibit. In the case of the 1-lag, 250-day autocorrelaiton of returns, the trends are clear. However, in other timeframes they are not usually.

      Also, please note that the autocorrelation diagram was not used to prove anything but as a form of illustrative corroboration.

      You could possibly ask at this point: If markets were mean-reverting after 2000, why did some trend-following models work well?

      It is wrong in my opinion to associate trend-following with momentum, as it is done relentlessly nowadays by some circles. You can get trends in mean-reverting mode. Timing trends has little to do with momentum trading but it is only a trend-following attempt using some indicators. Trend-following was successful long before the academic community discovered it and wrongly in my opinion classified it as momentum trading, and specifically price series absolute momentum. However, in essence all of what is classified as momentum nowadays is trend-following, whether it is absolute or relative. Trend-following works when it does and momentum has little to do with it. They just invented a different name for it to possibly avoid offering credit to technical traders that have documented it and successfully used it, such as for example the Turtles and many others. I traded currency futures in the 1990s with success using trend-following models and I never had the illusion that it was something related to momentum.

      Michael

  2. Gariki says:

    Awesome post. Very true.

  3. Darell says:

    Fantastic post, Thanks

  4. Mark Leeds says:

    Hi Michael: Yes, I think going further out with a lower frequency is difficult but going
    to a higher frequency ( but non-HFT ) is the area I'm working on.

    As you said, I think there's both ( one can be within other or vice versa ) and I liked your name for it. Very good name. And As far as names, yes, momentum, trend following, it's all kind of the same concept. In fact, one could view mean reversion as a downward sloping trend.

    My take on all of these behaviors is that the key thing is how one "catches-exploits
    them. That's the name of the game because the existence of these various behaviors is pretty well known. Great blog and thanks.

    • Hello Mark,

      You wrote that " In fact, one could view mean reversion as a downward sloping trend.". However, there can be uptrends in mean-reversion mode, such in the 2000s. The difference in my opinion and according to my research is that uptrends due to momentum are more robust and carry less risk.

      Michael

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