Which Momentum Models Are Set to Perform Over the Next Year?

When evaluating the performance of our momentum models we are considering the average performance across the one-, three-, and 12-month momentum models.

Summary

• Momentum models struggled over the past week, worst for the Nikkei and GBP/USD.
• Looking at past performance, it suggests our worst-performing models could soon become our best-performing – the S&P 500 momentum model, for example.
• Momentum models have turned strongly bearish on the Nikkei, and slightly bullish on JGBs, while we note they could have turned less bearish on GBP/USD if they were recalculated on another day.

Latest Signals

Equity momentum models replaced the Nikkei with the FTSE-100 in the strongly bearish camp (Chart 3). The 12-month lookback model for the FTSE-100 flipped to signal ‘sell’ while the opposite happened for the Nikkei’s three-month lookback model (Table 1).

Momentum models have flipped slightly bullish on JGBs having previously been strongly bearish. They remain strongly bearish on US rates, bunds, and long gilts.

Within FX, momentum model signals are unchanged. It is important to note, however, should the model signals be recalculated on another day, the one-month lookback momentum model for GBP/USD would now signal ‘buy’ (Chart 4 and Table 2).

Model Performance

Momentum models struggled over the past week – Nikkei and GBP/USD the most – with strong month- and quarter-end flows likely to blame (Charts 5, 6, and 7).

Looking at past performance, it would be no surprise for our worst-performing models to soon become our best-performing models, and vice versa (Charts 1 and 2). Indeed, we find that 12-month rolling returns are lowest for the S&P 500 over the past decade and highly elevated for US long bonds and EUR/USD – their 12-month rolling returns are mean reverting.

Turning to the US, the Federal Reserve’s next decision is over a month away, but Dominique is convinced the Fed are moving closer to her 8% terminal rate.

*The basic strategy is to use returns (lookback windows) to give buy/sell signals. So, if the US stocks are up over the past 3 months, you buy, otherwise you sell (note I use excess returns).

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

Ben Ford is a Researcher at Macro Hive. Benjamin studied BSc Financial Mathematics at Cardiff University and MSc Finance at Cass Business School, his dissertations were on the tails of GARCH volatility models, and foreign exchange investment strategies during crises, respectively.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)