My Trend Strategy: Process And Performance

My trend model invests in diversified stock index funds and seeks to avoid the severe losses associated with buy-and-hold stock investing. The model is based on Gary Antonacci’s published research but differs in its momentum and rebalancing criteria.

The core components of the trend model are:

  • A relative momentum step to select the top-performing equity region.
  • An absolute momentum step to reduce the probability of a severe loss.
  • A rebalancing step to ensure the model’s stance reflects recent data.

Relative Momentum

Relative momentum compares the returns of different assets to each other. Think of relative momentum like a horse race – always investing in the top-performing asset. My trend model is applied to U.S. stocks and international stocks. I specifically uses Vanguard’s total market-cap VTI (for U.S.) and VXUS (for international) funds. This universe covers 100% of the global equity market and is extremely low cost, with an average fund expense ratio of 0.07%.

Relative momentum takes advantage of the fact that the performance of domestic and international stocks tends to ebb and flow in multi-year cycles. For example, if the line in the graph below is higher than 0%, it means that U.S. stocks have outperformed international stocks over the past three years.

3-year return difference between U.S. and international stocks

The main input for the relative momentum step is the momentum calculation for each stock fund. The most common momentum time period is 12 months, meaning a fund’s performance is evaluated over the past year. For example, consider the following prices:










For this data, the 12 month momentum is calculated to be +21.2% for VTI and +26.2% for VXUS. International stocks had higher relative momentum than domestic stocks as of 12/31/2017.

My momentum calculation is an average of five different time periods: 3 months, 6 months, 9 months, 12 months, and 15 months. The momentum effect has been shown to persist in all of these time windows, but not over very short or very long periods. I don’t use an average momentum metric to try to outperform the standard 12-month period. Rather, I do so to diversify the model and not rely on a single time horizon when calculating momentum.

The chart below shows this average momentum measure for domestic and international stocks. You can see persistent trends in performance, from U.S. stocks outperforming in the late 1990s to international stocks in the mid-2000s.

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Disclosure: I am long VTI, VXUS.

Additional disclosure: U.S. stock data is an interpolation of historical dividend adjusted data for VTI and VTSMX. International stock data is an interpolation ...

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