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Absolute Momentum Woes

There are now two back-to-back golden crosses and two back-to-back death crosses of the 50-day and 200-day moving averages in S&P 500 that have generated losses. This is the highest number of consecutive losers in the last 66 years. Absolute price series momentum models are experiencing large losses after a period of relentless promotion.

The chart below shows the four last crosses of the 50-day and 200-day moving averages in S&P 500 and associated losses that include commission of $0.01 per (hypothetical) share:


The crosses are marked with red circles. On a total return basis (SPY), losses are much worse but the objective here is to show a timing model failure and not to calculate the exact P/L of momentum trades.

The four failed signals include two back-to-back death crosses and two back-to-back golden crosses. This is the worst development in this absolute momentum model since 2010 when there were three consecutive losers, two short trades and one long.

In a complete state of denial of reality, absolute momentum promoters continue to rest their claim on either wrong calculations plagued by look-ahead bias or wishful thinking. They have been warned by this blog (as far back as in 2013) that protracted sideways action will destroy returns from trend-following and absolute momentum. Momentum traders are an easy prey I wrote in 2012. Instead of thanking me for the analysis and warning, they blocked me in Twitter. Now they are licking wounds. I am not happy for that but anyone who denies reality is destined to lick wounds. Stock market timing is not easy and an impossible scheme for most traders with simple models. Those good times are over. Anyone who shows performance from times when there were no cars, telephones or computers in an effort to support the validity of some models is a victim of extreme hindsight bias.

Note that some cross-sectional momentum models still perform well. Tomorrow I will have another blog with longer-term performance of some key absolute price series momentum models that show that they are broken.

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