With a Little Help From My Friends

Central Javanese Sultans have very long names.

The current Sultan is known 'His Majesty, Sri Sultan Hamengku Buwono X' to his friends, you should keep it that way as his full name is,

Ngarsa Dalem Sampeyan Dalem Ingkang Sinuwun Kangjeng Sri Sultan Hamengku Buwono Senapati ing Ngalogo Ngabdurrokhman Sayidin Panatagama Khalifatullah ingkang jumeneng kaping X

I feel the same when I read descriptions of momentum.

E.g.

The most robust, cream of the creamiest, consistent, princely investment strategy, destroyer of worlds

There's a bunch of ways to calculate it too.

Memorably someone chastised me because I likened momentum to staring into the abyss.

Maybe my expectations are too high, but even the most glorified strategy research is not very compelling in practice.

Here's the simplest and perhaps most useful definition of momentum I can come up with, apart from 'meh'.

If a return is followed by a return of the same sign the stock is said to be characterised by 'momentum' during that period.

In any case, applying this logic to the iShares Momentum ETF's returns (MTUM) over the last 2 years results in this,

(NYSEARCA_MTUM from Google Finance using the Lazy PCA site)

A small sample of monthly returns, but also off-the-charts mean reversion.

Let's round out the ellipse by applying a mean reversion style strategy.

In my case I weighted as follows

-Previous month's Return

on a monthly basis when a 'large' return just occurred the previous month; otherwise weight with some meaningful constant.

The specific code for the Lazy Backtest IDE is here.

As the One Ring Conjecture suggests, the result is a more circular ellipse (still working on being able to graph sich a result nicely however).

The Sharpe jumps a third from 1.4 to 1.9.

Mean reversion is a common feature of momentum portfolios over time, once detected it's a very nice way of boosting returns, and also a little ironic.

Merits more data and time.

Stop laughing at the back!

People take momentum very seriously.