Starting Quantitative Momentum after reading the book…
I will be selecting LargeMidcap 250 universe with 15 days re-balancing. To start with, I will allocate 5% of my portfolio to this strategy. Mostly 15 top ranking stocks I will be selecting.
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Hi all, After long time…update on strategy and portfolio…After reading Wesley book and many other material , I finalised my startegy to follow Rank-based momentum.
I selected 2 seperate uinverses :-
- Smallcap 250
- Microcap 250.
I have applied screening criteria as within 20% from All time high as well as within 20% from 52 week high. and daily average volume requirement is 1 crore.
I have selected 10 top ranking stocks from each universe. Thus total 20 stocks portfolio.
I will be re-balancing twice a month…Mostly on 1st and 16th of each month. My worst held rank will be 25th for each universe (top 10% of universe).
so my portfolio currently looks like this :
Microcap stocks :
- Strides Pharma
- Choice International
- Neuland Labs
- PGEL
- LTFOODS
- NAVA
- Anantraj
- Gravita
- Garware Hi-tech films
- Sharda Motors
SmallCap Stcoks
11) Glenmark Pharma
12) Godfrey Phillips
13) Inox Wind
14) PCBL
15) Eris Lifesciences
16) Granules
17) Suven Pharma
18) Natco Pharma
19) Himadri Specialty
20) Deepak Fertlizers
Currently 23% of my overall portfolio is in this strategy. If I get comfortable and more convinced, I will be shifting slowly my remaining 77% ( which is currently in mutual funds) to this startegy. If I take this decision in future, then I will be selecting the universe of Nifty 200 and Midcap 150 as well.
Returns : from 1st August 2024 till 1st Sept 2024 = 6.25%
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One Query has come. so some further explanation :
These ranks are based on Sharpe returns. Sharpe returns are price returns divided by volatility.
I use average Sharpe returns of (3months+6months+9months+12 months) . I use a paid subscription of readymade screening website momoscreener This is for information, not for promoting it. There are many such ranking websites available which gives you readymade ranking of your selected universe as well as your customised screening criteria.
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Just finished reading Stocks on the Move by Andreas Clenow. After reading the book and seeing the yearwise performance from 1999 till 2014, the conviction over this investment stratrgy is definately increased. Still some apprehensions…
Currently we have momemtum funds in three different universes…
- UTI nifty 200 momentum 30 fund
- Tata Midcap 150 momentum 50 fund
- A NFO of Motilal in the process Motilal Nifty 500 momentum 50
So now we have 3 funds with different universes using this strategy. The only problem is , all these 3 funds have 6-monthly re-balancing frequency. And in 6 months, many things can change. I have checked charts of the stocks in their portfolio and there are many stocks under consolidation or even in down trend, as the next rebalancing will happen in December. Till that time, they cant change the stocks. Being DIY, I can apply weekly rebalaning also and capture the changes promptly.
But with current budget , our short term capital gain is now 20% and then we have transaction costs, while in case of mutual funds, being trust entities , Capital gain tax doesnt apply to them.
Now only issue is how much of drawback of 6 month rebalancing will affect their performance and how much of it will be compensated by being tax efficient.
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They are institutions, so they cannot get in and out quickly, as we do. Not just because of their size, but also because they will do some analysis of the business. So a few weeks or months of consolidation may not matter to them, if they believe the relative long term story is intact. They may or may not take decisions based on single stocks, and may look to make return on the whole basket, in a period of time.
Can we do what they do, depends on the objective of our strategy. If we don’t mind higher taxes, brokerage and other charges, and are confident enough of our system to catch new trades, we can move in and out when we see momentum waning in our positions. One way to look if this works or not is to have some data of at least some period, to draw inferences. Do what we want to do, experience gains and losses, let some data come, let some time pass, analyze all of this, and change or let it continue as per the requirement.
One thing that can derail the entire process is the change in the market regime, if there is no conducive market, we may have to change our process, or experience frequent stop losses/drawdowns. It will take a lot of time and tinkering to come up with a system that can work in all kinds of environments, if it can be created, or create multiple systems for different environments.
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Has anyone done an back test where an momentum style does well when market is in a prolonged stagnation (3 years 1-3% CAGR of whatever index you choose. Do you do weekly/monthly/quarterly rebalancing in such a case.
What are results vs a value-based approach in such a scenario.
As momentum is not one particular style, and is a broad term, I think, the system that is used in a trending market can be modified for a much smaller universe comprising of large and some midcap stocks. Everyone knows about these stocks, so there wont be big profits, but the returns could be relatively better than the broad market.
Complete assumption, yet to participate in such a market, although from time to time seeing lesser interest from buyers, but prices going up again quickly, continuing the bull run.
@ChaitanyaC In momentum fund…which is quantitative momentum, there is no place for fundamentals or any business analysis or story. First of all, Momentum is a very broad term. What Mark Minervini does or what Stan Weinstein does or what William Oneil does are all different forms of momentum. In case of William O’neil and Minervini , they give importance to fundamentals, earnings, sales etc while focusing on price momentum.
But in case of quant momentum, its completely price based, ranking momentum. So if you read their Fund prospectus, it clearly mentions that they follow particular Index of nifty, no consideration for business analysis.
Also there are no stop-losses in this sytem. Till the stock is in the rank list, and doesnot cross worst held rank, it will be in portfolio. Once it goes down in the ranking , it will be dropped.
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@ChaitanyaC
Your guess work that the process will be derailed in non-conducive market is not correct.
@hardik_shah1
In Stocks on the move…where author/Fund manager has applied the quantitative momentum with basic underlying condition that whenever S&P 500 goes below 200 day moving average, he will stop buying new stocks while doing weekly re-balancing. And also stocks will be sold when they go down 100 day moving average of lower ranks.
The effect of these condition was such that during 2000 Dot com burst, or in 2008 in GFC, what automatically happened is, since S&P500 went below 200 day moving average, they stopped buying new stocks. And one by one their stocks in portfolio, out of total 20 stocks started going below 100 day moving average and they started coming into cash. The effect was so dramatic than normal S&P 500 was down 60% during year 2008 while their portfolio was down by merely 17-18% and they went into cash and remained in cash for almost 18 months during that period as S&P 500 was below 200 day moving average , so they couldnot buy any new stocks.
so against the popular belief that during bear markets, momentum portfolio doesnt outperform, actually this quantitative momentum portfolio had a very less drawdown compared to general market index as they were forced into cash during downtime…So when the whole world was going down…they were in cash and protected their downside beautifully.
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I have not read any prospectus, so I don’t know what funds in India are doing. I was thinking in terms of their size. And, it is possible that, if they have allowed themselves some leeway in writing, it allows them to modify their allocation to stocks, as they too will lose along with us in a market crash. Not to mention the fact that, not all the investors will stay for periods of non-performance, as that is not part of their plan, nor they can afford.
My non conducive statement is also in relation to this. If there is no liquidity, no exuberance, and if prices fall, the past high returns generated with momentum cannot be repeated. Of course, the performance will be relatively better, as the cash component increases. I have experienced this.
What I think of momentum, what you are doing, what @visuarchie is doing, are different. And, I am very much interested to learn about the ways to do this, and share my two cents.
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@ChaitanyaC You are right. When overall liquidity decreases, money flow is no longer there, that time number of stocks doing fresh 52 week high or All time high decreases. Overall market starts declining in that scenario. So whether you are a value investor, Deep value, Growth, GAAP, GARP, all the strategies will suffer that downfall. Everybody will go down. So no surprise that momentum strategies will also suffer. But in quantitative momentum, you will have a way out of market.The strategy will automatically will push you into cash. While in buy and hold strategies, you will keep on holding and bearing the whole downturn. That way, contrary to popular belief, quantitative momentum will by design have lower drawdowns. In case of breakout strategies, which many members here follow, like @hitesh2710 , they have experienced in 2018, in such low liquidity bearish market, breakout patterns fail consistently and its very frustrating. Also in quantitative momentum @visuarchie , as market starts turning from bear phase to bull phase, you are automatically pulled into buying stocks when overall index starts coming up above 200 day moving average. So overall strategy itself forces you out, when market is not favourable and it also invites you in, when tide turns. You dont have to have any selective bias of entering and exiting.
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I will try to think aloud here about this strategy.
At Valuepickr, where majority members are doing business analysis, trying to find valuable companies , understanding balance sheets, and annual reports, concalls, line by line, this quantitative momentum seems very alien. But lets give some thought to it, what exactly its trying to achieve.
But before that, we will see how our index , or for that matter any major index of any country, how its constituted and how its changed over time. Do you think, Sensex or Nifty or S&P 500 are formed by their committee by doing business analysis, their valuation? Do you think they see PE ratio, PB ratio, quality of promoters, business moats and then enter the stocks in Index. And remember these Indexes are followed all over the world and its an indicator of overall equity market of that country and most institutional investment happens in these Indices.
The basic structure of Index is, they are market capitalization weighted and selected in Index on the basis of their size and liquidity of trading. Any stock which gets place in Index, has a history of strong performance behind it and it becomes big and eligible to enter into Index. Like recently Trent is entering into Nifty 50 Index. Have they considered its PE of 200 before making it part of Index. Similarly LTI MINDtree and DIVIS labs are going out of Nifty 50…Is it because they have lost their moats?
a Big No. All Indices, including Nifty are based on quantitative momentum but with a large view and larger time frame. They are also rebalanced every six months and most performing ( price wise) and most liquid are taken inside. And less liquid and non performing are thrown out.
So even if we feel and think , this strategy is alien, actually its practiced everywhere and from long long time in one form or the other, with difference is only of screening criteria.
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Thanks, Mudit for explaining the process.
Any more reading on this from a base perspective. I will openly say I do not have the time right now to devote to learning entire new strategies so apart from books, any blogger who goes into this in depth would be appreciated.
I have this book now…If I come across any blogger , I will inform
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This blog of Portfolio Yoga also doing this from 2015-2016, I guess
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Useful link. Just irregular pieces are used to create a mosaic, things like these help.
Do post links to articles, websites or videos that talk about concepts and thought processes like these which you think are interested, as you are creating a system for yourself.
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Rebalancing day Pre-poned as 15th is sunday.
Rebalancing Day- 13th Sept 2024
Changes :-
Sell
- Granules
- Deepak Fertilizers
- Garware Hi-tech
Buy
- Glenmark lifesciences
- Piramal Pharma
- IIFL securities
Reasons for selling :-
Deepak and Garware went beyond 25th rank,
While Granules got dropped altogether from the list because it breached 100 day moving average also after yesterday’s fall of 16% in a day. I am selling it at loss of 21%.
So as stocks go below 100 day moving averages, it automatically gets dropped from list and hence sold. Its a beautiful method of cutting your losers early. In case of Granules, I would have sold much earlier but yesterday’s action was too fast. This happens rarely. So system doesnt allow you to sit with losers for long. I remember my old days of fundamental investing, where i was with Laurus Labs for almost 2 years in minus 45%. And Divis labs with minus 30% for more than a year.
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Thanks Mudit for such thorough and detailed insights.
One question regarding the new entry that you make while rebalancing.
Do you know invest all your intended amount in one go in the new entry stock?
For instance today you entered in Glenmark (or other 2 stocks for that matter), so you invested the entire amount that you had kept aside for this new entry or just the first chunk (if you plan to do it in multiple chunks).
Currently I am not adding any fresh capital till atleast next 6 months. So whenever I sell any stock, that sale proceeds will be entirely invested in one go in new entry. So i sold 3 stocks today and entire proceeds are invested in 3 new stocks at one go.
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In zerodha coin app today I see, uti nifty 200 momentum 30 fund came to top (sorted by absolute returns percentage) from bottom.
When I checked if it is some glitch in transaction history, I find 4 days back dividend of 50% units credited to the portfolio.
Do you see that too? Or is it indeed a glitch on my app?
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