Tuesday, April 24, 2012

The Power of Momentum

Gary Antonacci of Optimal Momentum blog has a great white paper out titled 'Risk Premia Harvesting Through Momentum' that details...

Momentum is the premier market anomaly. It is nearly universal in its applicability.
Gary then outlines how an investor can easily apply momentum through the use of asset pair modules to "effectively harvest risk premium profits". I highly recommend anyone interested in momentum or learning more about momentum to check out the (easy to understand) white paper that you can download here.

Reading the paper gave me an idea for a test that I felt would further show how universal momentum truly is. The test? How well would an investor have done applying momentum to the various cities that make up the Case Shiller Home Price Index, pretending (of course) that each city index was investable and liquid (i.e. things they aren't).

First, a quick update on the Case Shiller Home Price Index. To the Huffington Post:
The Standard & Poor's/Case-Shiller home-price index shows that prices dropped in February from January in 16 of the 20 cities it tracks.

The steady price declines have brought the nationwide index to its late 2002 level. Home prices have fallen 35 percent since the housing bust.

Prices in nine cities fell to their lowest levels since the housing bust. The average price in Atlanta fell 17.3 percent in February compared with a year earlier. That's the biggest annual drop in the history of the index for any city.
Yikes... let's see what momentum can do with this mess.


1) Take the 6-month rolling return for each city
2) Allocate the next month to the city that had the highest six month return

How well would we have done?

The chart below outlines the performance of this relative strength allocation, the composite-10, and Portland (which happened to be the best performing city over this time frame... who knew).

For those keeping track at home, that's a 12.7% annualized return for the relative strength index vs. 3.3% for the composite-10 and 4.8% for Portland, despite there being no rule that allowed an investor to get out of the market.

Not too bad.

Source: Case Shiller

One reason I was drawn to Gary's paper is that it is remarkably similar to something I've been working on for the better part of the past year, which itself is based on conversations that I've had with Meb Faber from World Beta over the past few years. If you haven't read Meb's paper A Quantitative Approach to Tactical Asset Allocation, another strong recommendation.


  1. Wow - adjust that for inflation and it goes down a bit, but...adjust it for typical leverage on real estate (what is typical down payment now? It was something horrible like 4% in the bubble, and I know they want 20% now but I doubt they get it) and it should be an astronomical return (until the leverage blows you up of course ;-) )

  2. I would be curious to know which cities were being held the last couple of years as I was under the impression all cities in the US have declined. Perhaps DC held up or NY has held up reasonably well, but I'm wondering how this strategy is basically flat over the last few years. Impressive.

  3. Charlotte throughout late 2007-summer 2008, Dallas / Cleveland through 2008, back to Dallas, then San Francisco for almost a year from mid-2009 to mid 2010, San Diego for a few months, then D.C. for 8 months, and two places crushed (Atlanta and Detroit) for much of 2011

  4. Would it be possible to get you to post the spreadsheet of this analysis so I can did into the numbers and charts and leapfrog my analysis?

  5. Data can be found here: http://tinyurl.com/7y6qbxj

  6. It's entirely too lazy of me to hope that someone could cross this with something that also harvests the value anomaly, then adjusts position size automatically per some volatility sensitivity (http://advisorperspectives.com/dshort/guest/BP-120508-Volatility-Management.php) and packages it as an ETF can buy, isn't it? :-). Thanks for the pointers to the source papers Jake