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A Hard-To-Beat Strategy

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Despite its simplicity, it is unlikely that the majority of macroeconomic and discretionary technical analysts outperform this hard-to-beat strategy over sufficiently long time periods.

My article, Macroeconomic Analysis or Simple Technical Indicators? on March 2, 2024, attracted more interest than I was expecting. However, this interest was met with some backlash from a few financial social media accounts that focus on macroeconomic and discretionary technical analysis.

Why do macroeconomic market analysts feel they can be critical of all other methods besides their own and are immune to criticism? For more than 30 years, I have noticed this pattern, with macroeconomic market analysts blaming systematic trading for being “noise” while praising their own analysis as something that relied on “fundamentals.” In the past, traders used macroeconomic analysis to determine which markets or sectors to trade, while they used technical analysis to establish entry and exit levels in a discretionary or, ideally, systematic manner. I believe this sensible approach came to an end when macroeconomic market analysts, for some reason, decided they could handle both market selection and timing. Then, the attack on technical analysis and systematic trading began.

The truth is, however, that after quantitative easing, the effectiveness of fundamental analysis diminished, as did that of traditional discretionary technical analysis. Recently, with huge fiscal deficits and exploding public debt, it has been hard to apply the macroeconomic principles used in the past. At the same time, discretionary technical analysis has faced headwinds from changing market regimes and rising option volume, which affect market dynamics in unpredictable ways.

Below are a few key excerpts from my March 2, 2024 article:

One problem with macroeconomic analysis is that the sample of past recessions is small, and the confounders are always different. In the present environment, one confounder has been the savings of the consumer. This has invalidated previous relationships between an inverted yield curve and decreasing economic output.

More importantly, one serious issue with macroeconomic analysis is that a quantitative historical analysis is hard or even impossible. Even if one can build a forecasting model using macroeconomic analysis, it is highly likely that, due to complexity and non-linearities, the confidence intervals will be very wide.

[S]ome traders and investors have decided to rely on simple technical indicators that track the momentum of the market. The simplest model is price-series momentum.

You can use the price-series momentum strategy as a benchmark to gauge the effectiveness of macroeconomic and discretionary technical market analysis. In fact, it is a simple strategy, but it has proven to be quite robust.

The backtest below shows the performance of the simple 12-month price series momentum in the SPY ETF from inception to May 31, 2024: buy on the next open when the price is above the average and sell on the next open when it is below.


Despite a 13% loss in 2022, this simple strategy recovered, and equity rose to new highs. The annualized return is 9.3%, the maximum drawdown is 22.6%, and the volatility is 12.8%. The maximum drawdown is less than half of that of buy and hold. Beta is about 0.5, and the Sharpe ratio is 0.73. The strategy could suffer losses under specific market conditions, but until now, it has performed relatively well. It can serve as an excellent benchmark for unleveraged macroeconomic and discretionary technical market analysis.

Many macroeconomic and technical analysts use leverage. Especially after the advent of thematic ETFs, it is easy to “hide” leverage. Many new ETFs use index futures, as well as other leveraged ETFs, to increase their leverage. The performance of this simple strategy with 2x leverage is shown below.


The annualized return is 15.6%, the maximum drawdown is 39.2%, and volatility is 21.4%. Beta is about 0.8, and the Sharpe ratio is 0.73.

The table below summarizes the performance of these simple unleveraged and leveraged benchmarks, comparing them to SPY ETF buy and hold.

Momentum Momentum with Leverage Buy and Hold
Annualized return 9.3% 15.6% 10.3%
Maximum drawdown -22.6% -39.2% 55.2%
Volatility 12.8% 21.4% 18.7%
Sharpe ratio  0.73 0.73 0.55
Beta 0.47 0.77 1.00

Undoubtedly, the simple 12-month, long-only momentum strategy provides a formidable benchmark for discretionary macroeconomic and technical market timers, particularly for those who use leverage. For a moment, consider the amount of effort required to time the markets using macroeconomic and discretionary technical analysis, compared to the simplicity of this strategy. This simple strategy could serve as a benchmark because of its simplicity. I doubt that even 5% of macroeconomic and discretionary technical market analysts have outperformed or will outperform this simple timing strategy in the future.

There are strategies with improved risk-adjusted or even absolute returns for both traders and investors, but the simple 12-month momentum strategy is a good starting point for further work and analysis.


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Specific disclaimer: This report includes charts that may reference price levels. If market conditions change the price levels or any analysis based on them, we may not update the charts. All charts in this report are for informational purposes only. See the disclaimer for more information.

Disclaimer: No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.

Charting and backtesting program: Amibroker. Data provider: Norgate Data

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