In May 2015, Huseyin Gulen and Ralitsa Petkova published "Absolute Strength: Exploring Momentum in Stock Returns" (SSRN). In the paper they outline their new concept of absolute strength momentum. Momentum, in its traditional form, was a relative strength concept. Momentum took the

I. Trading Strategy Concept: Volatility breakout strategy based on price deviations defined by Minkowski Distance where: Upper_Band = Mean + (Multiple × Deviation); Lower_Band = Mean − (Multiple × Deviation); Deviation((Close)k=1,…,K, Mean) = (∑|Close − Mean|λ ÷ K)1/λ. Minkowski

I landed in a town in Western Sumatra called Padang a few days after an earthquake hit. 7 or 8 on the Moment Magnitude scale. Just as in finance there are various ways of measuring quakes. The Richter scale measures ground motion whereas the more modern Moment Magnitude scale measures energy

In the previous 3 articles I discussed backtesting a trading strategy in Excel using the vectorised methodology. This article will cover the same strategy but in R. This article is more of a supplement to the already published article by Joshua Ulrich on FOSS Trading and is for readers looking for

If you want to be sure to be notified about enrollment opportunities, please sign up to “follow” my blog. I will post that information on this blog. The “old” course We’ve had four very successful sessions of my MOOC “Computational Investing, Part I” at Coursera. The Coursera run

Authors: Engelberg, McLean, Pontiff Title: Anomalies and News Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2631228 Abstract: Using a sample of 97 stock return anomalies documented in published studies, we find that anomaly returns are 7 times higher on earnings announcement days and 2

This post is based on an article I wrote for Active Trader Magazine. "Buy to the sound of cannons, sell to the sound of trumpets." -Lord Nathan Rothschild, 1810 The Rothschilds were one of the world’s richest families and formed a modern financial dynasty. In 1815 they were rumored to

Scott’s Investments provides a free “Dual ETF Momentum” spreadsheet which was originally created in February 2013. The strategy was inspired by a paper written by Gary Antonacci and available on Optimal Momentum. Antonacci’s book, Dual Momentum Investing: An Innovative Strategy for Higher

After publishing our Two Centuries of Momentum article last week, we received a number of requests for our thoughts on the recent underperformance of multi-asset, relative strength portfolios. Now, we tend to fall more on the trend following side of momentum. So we wanted to spend some time talking

Warren Buffett made news this morning, not just for making the largest acquisition of his career, but for making it at a relatively lofty 22x earnings multiple. Reuters reports: Warren Buffett is paying a hefty price for the biggest acquisition of his career, now that his Berkshire Hathaway Inc has

Summer bounce for our Wisdom State of Trend Following report. A strong up month ends the downslide seen in the second quarter and ensures the YTD performance is more comfortably in the black. Below is the full State of Trend Following report as of last month. Performance is hypothetical. Chart for

When doing financial modeling, one of the first things to look at is if your empirical work makes sense. In other words, are there valid economic reasons why a model should work? This can help you avoid drawing erroneous conclusions based on creative data mining.[1] Next, you should look for

This is the first article in a series that will review the performance of selling options strangles on the Russell 2000 Index (RUT). For background on the setup for the backtests, as well as the nomenclature used in the charts and tables below, please see the introductory article for this series:

Open source software has many virtues. Being free is not the least of which. However, open source comes with “ABSOLUTELY NO WARRANTY” and with no power comes no responsibility (I wonder..). Since no one is paying, by definition it is your sole responsibility to make sure the code does what it is

The best quant mashup links for the week ending Saturday, 08/08 as voted by our readers: Two Centuries of Momentum [Flirting with Models] Fooled by Dividend-Induced Upward Drift [Price Action Lab] VIX Trading Strategies in July [Volatility Made Simple] Interview with Scott Andrews [Better System

As we have made clear in the past, we are fascinated by the economics of open source software. This business model makes sense for massively scalable and ubiquitous bits of technology, but surely it must be anathema to the closed world of trading, right? This has an intuitive appeal, we know of

Pinto, Henry, Robinson and Stowe (2010) define momentum indicators as valuation indicators that are based on the relationship between price or another fundamental, earnings for example, to a time series of its historical performance or to the fundamental’s expected future performance values. When

In their groundbreaking paper, “Digesting Anomalies: An Investment Approach,” Kewei Hou, Chen Xue and Lu Zhang proposed a new four-factor asset pricing model that goes a long way toward explaining many of the anomalies neither the Fama-French three-factor nor subsequent four-factor models could

Introduction I have the privilege of working with two of the sharpest minds in the industry. Last week I had a discussion with them via email about selecting a suitable benchmark for the strategies I run. I was specifically questioning them on the use of cash returns as a benchmark. This is a

This brief post will serve as the coup de grace for our “Junkie Market” series. By that, we are referring to days on which there are numerous (in this case, at least 100) new 52-Week Highs AND 52-Week Lows. We have covered such occurrences on the NYSE and the Nasdaq exchanges. If you’ll

Of the major asset classes, private equity has recently had the best absolute returns. According to Cambridge Associates, the 25-year return on private equity was 13.5%, relative to 9.75% for the Russell 2000. Academic studies, surveyed recently by Steven Kaplan and Berk Sensoy, have consistently

If you tell someone you're trading, the first thing they'll usually ask is "Have you made any money?" It isn't usually this easy to tell if a trader has made money or not Most traders I've known are pretty obsessed with that question as well. Knowing the answer to that

Over the last six blog posts we looked at the backtest results for over 13,900 options strangles sold on the S&P 500 Index (SPX). Eight different exit approaches were tested on these strangles, including: Strangle (100:50) - exit if the trade has a loss of 100% of its initial credit OR if the

Summary Diversification and trend-following often fail to protect investors in sudden, tail-risk events By being constantly hedged to such events, investors can help manage this risk, but remaining hedged requires paying an often significant “insurance premium” Spot CBOE VIX would be a great

In the second post on the price factor, Leo Cheng commented that "I (sic) remember reading somewhere that the low price stock January effect is due to fund managers taking extra risk in January. Their bonus is usually calculated every reporting year (December) and the best way to begin the year

The relationship between risk and return has long been a topic for discussion and research. Investors and investment managers seek financial models that quantify risk and translate that risk into estimates of expected return on equity (Mullins, 1982). This post will look at and discuss the

Recent research has confirmed the behaviour of traders that significant excess returns can be achieved from following the predictions of the carry trade which involves buying currencies with relatively high short-term interest rates, or equivalently a high forward premium, and selling those with

Short term t-bills are an astoundingly bad investment. The Sharpe ratio is 0.047 over 50 years - a tenth of the S&P 500. The skew is negative and Max Wait to profitability is 14 years! The Sharpe Trajectory shows that the IRX (13 week t-bill) index is all over the place - extremely inefficient,

We hear it all the time. “You must use stops.” And most of us use them. But do you know how they change your strategy results? Are they improving your results by giving you higher CAR or lower maximum drawdown? Recently I was speaking with a reader about this topic and he insisted that it you

A momentum-based investing approach can be confusing to investors who are often told that “chasing performance” is a massive mistake and “timing the market” is impossible. Yet as a systematized strategy, momentum sits upon nearly a quarter century of positive academic evidence and a century

I've been thinking about applying factor analysis to commodity futures. People have studied this idea but commodity factors have not been studied to the same degree as equity factors. This is to be expected. Stocks are parts of companies and there are many commonalities between the operations

Research into the determinants of fixed-income returns have found that a number of stock and bond market risk factors can be shown to demonstrate explanatory power beyond the standard term-structure variables. Ivelina Pavlova, Ann Marie Hibbert, Joel Barber and Krishnan Dandapani—authors of the

In general, investors focused on affordable stocks with strong fundamentals have been taken to the cleaners year-to-date. Meanwhile, expensive stocks with poor fundamentals have been rocking! Some Basic Statistics: Below we document some core performance figures using Ken French’s data on

The financial crisis of 2007 to 2009 highlighted the importance of downside risk management. Many managers that protected capital during this period saw their AUM balloon. Some of these same managers underperformed in the post-crisis years. This underperformance should be anything but surprising. We

In my previous article I went over how to add a position sizing rule and in this one I will complete homework exercise 2: adding a stop loss and trailing stop loss. Adding a stop loss in R is way easier than building it into Excel, I had to think for some time as to how I was going to break it down

This week we received an email from an advisor that echoes some calls we’ve been receiving lately. We thought it would make a great topic for us to cover in our commentary this week. The email read: We’re seeing a lot of negative indicators in the market right now, and seeing commentary from

Having just written and, thankfully, passed the CFA Level I exam I wanted to take this opportunity to share my experience writing the CFA Level I exam given that I come from an unconventional academic background and work in the industry as a quantitative analyst. I also want to share some helpful

Perhaps the most widely known form of statistical arbitrage is called Pairs Trading. In this general strategy, we start first by picking two stocks which are highly related to one another (either by correlation, cointegration, or both). One method for finding such pairs is to use a network graph

Last week we had a fairly long post on a valuation based asset allocation strategy that might actually work. This post followed a couple of other research projects on the issue, which showed limited evidence for simple valuation-based timing strategies. Now there is a new paper on Warren Buffett’s

A while ago I wrote a post, "Does the VIX Know More Than the S&P 500?", and concluded "when the VIX and the S&P 500 are both up on the day sell the stocks, either through the futures of an ETF. " An astute reader, Leo Cheng, pointed out that the VIX index has a certain

Since Rolf Banz published his groundbreaking paper that identified the so-called “small stock effect” in 1981, the investment community has acknowledged the existence of a return premium afforded to smaller-capitalization stocks over their larger counterparts. Banz’s study demonstrated that

The success of the carry trade strategy has led to its widespread proliferation, despite the fact that it contradicts economic theory. In short, this strategy involves borrowing (going short) a currency with a relatively low interest rate and using the proceeds to purchase (going long) a currency

Scott Andrews is the CEO and Co-Founder of InvestiQuant. Scott has been trading full time since 2004, finding great success trading the opening gap and launching MasterTheGap.com in 2008. Scott has published over 1,500 daily gap analysis videos and his exact gap trading plan prior to the market open

The Ivy Portfolio spreadsheet track the 10 month moving average signals for two portfolios listed in Mebane Faber’s book The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets. Faber discusses 5, 10, and 20 security portfolios that have trading signals based on long-term

The best links for the month of July, as voted by our readers: P/E “Attention” Strategies Earn Monthly Excess Return of 1% [Alpha Architect] Back to Fundamentals [Dual Momentum] New Paper from Markowitz: Introducing the Gerber Statistic [Flirting with Models] Video: James Simons – Numberphile

Abstract: The short ratio — shares shorted to shares outstanding — is an oft-used measure of arbitrageurs’ opinion about a stock’s over-valuation. We show that days-to-cover (DTC), which divides a stock’s short ratio by its average daily share turnover, is a more theoretically

SPX Strangle - High Loss Threshold - 80 DTE This post looks at selling one-lot options strangles on the S&P 500 Index (SPX), initiated at 80 days-to-expiration (DTE). The results in this post were derived from more than 2300 individual trades entered by the backtester. Other 80 DTE variations

We are now about a year and a half away from the next presidential election. This means that the campaigning has been underway for over a month. Quite why the electioneering needs to last for a third of a presidential term is beyond me, but that might just be because I am a closet communist

There are many studies showing that models beat experts, including the meta-study “Clinical versus mechanical prediction: A meta-analysis” by Grove et al. (2000). However, given this knowledge that models beat experts, forecasters still prefer to use the human (expert) prediction as opposed to

Recently we read an excellent article on investing from Alpha Architect entitled One way to beat the market? Be different! In the article, the author shows how thinking differently from the pack can provide better performance for your investment portfolio. As often happens with lateral thinking,