The US Momentum strategy works on the idea that stock prices that have risen significantly over the past, relative to their peers, tend to continue to outperform. This is known as the momentum effect and has been examined extensively in the academic literature. This strategy takes advantage of this effect by buying the top 10 momentum stocks in the S&P 500.
Latest Update – 01 April 2020
Being the 1st trading day of April, it is time to re-balance our US Momentum portfolio. To begin, the S&P500 closed for the month of March at 2,584.59, well below its 200-day moving average at 3,026.72, meaning that we will continue to hold the ‘defensive portfolio’ for the following month. As a reminder, if the S&P500 is below its 200-day moving average, we sell out of the top 10 momentum stocks, and hold a portfolio comprised of TLT (US treasury bond ETF), UUP (USD Index ETF), and XAUAUD (Australian dollar spot gold).
As a reminder, this strategy rebalances on the 1st of each month (or the next business day if the 1st is a non-trading day). For specific details of closed trades, please see our closed trades page.
For historical trade updates please click here.
|Stock code||Stock name||Rank||Qty||Entry date||Entry price||Current price||Current value||Return percentage|
iShares 20 Plus Year Treasury Bond ETF
|107||2 Mar 20||$155.31||$165.09||$17,664.63||6.30%|
Invesco DB US Dollar Index Bullish ETF
|628||2 Mar 20||$26.53||$27.14||$17,043.92||2.30%|
Spot Gold / Australian Dollar
|10||2 Mar 20||$2,431.80||$2,431.80||$24,318.00||0.00%|
*Quantities are based on investing US$5,000 per stock on the entry date
**All dollar values are in US dollars, and therefore returns are calculated as a US dollar return. Depending on whether or not you use hedging to manage your currency, exposure will determine whether you need to adjust returns to account for exchange rate effects.
US Momentum Strategy
The S&P 500 index contains the largest 500 companies listed in the US and therefore provides a good pool to find large capitalisation stocks that may exhibit the momentum effect. By searching this universe for stocks that have risen the most over the prior 6 to 12 months, we are banking on previous momentum persisting for a good proportion of the chosen stocks.
Of course, not all trades will be winners, but according to the back-testing, the strategy closes 54% of trades with a profit and produces an average return of 14.0% for these trades. On the other side, the average loss per losing trade is only -7.6%. These statistics show why the strategy can produce a market-beating return over the long term, but they also show that it only works when an investor buys the entire portfolio. Picking and choosing individual stocks from this table has a reasonable probability of selecting a losing trade. Similarly, adjusting the portfolio when the strategy re-balances each month is essential to make sure you hold the optimal portfolio of stocks.
How To Follow This Strategy
Rivkin’s strategies are designed to be as easy as possible for investors to follow. To follow the US Momentum strategy, investors need to buy the stocks in the above table in equal weights. Weights can drift over time as stock prices move, but we only recommend re-balancing stock weights if they stray too far from the target weight (10% per stock). The stock volumes shown in this table are based on a US$5,000 investment per stock which produces a US$50,000 portfolio. Being a US strategy, this is priced in US dollars and therefore, to get the Australian dollar value, the current exchange rate should be applied.
Once per month, the list of stocks will be updated in what we call a ‘re-balance’. This means investors will need to look at the new list and sell any stocks that are no longer on the list. After these stocks are sold, the new stocks from the current table can be bought.
About The Strategy
The US Momentum strategy was developed by Rivkin during 2015 and was rolled out as a strategy to clients in April 2016. Extensive back-testing was done to create and refine the strategy, and it is this back-testing that we rely on to give us increased confidence about future expectations. Please click here to find out more about the strategy.
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