Great Articles on Momentum and Trend Following

Great Articles on Momentum and Trend Following

This is a great article on the history and academic foundations on momentum and trend following. It gives a great explanation from behavioral science as well as information theory for why momentum works in markets.. Furthermore, it also integrates momentum and trend following, and explains why both are two sides of the same coin. The article is well grounded academically. A great read:

Two Centuries of Momentum

Trading Performance February 2018

Trading Performance February 2018

After a stellar performance in January, February 2018 did not turn out to be great from a trading point of view. This poor performance was also dictated by the fact that I behaved in a really stupid manner and in a discretionary way, I overrode my system for a considerable number of days. It was not very clever, and I think that the motivation was to protect the returns I made in January. However, the net effect, I believe was that it further depressed the results. I am not at all proud of this moment of weakness.

Here is a table of the trading returns for the month(Click to zoom in for a better view):

Trading Performance
Investment and Trading Performance in January 2018

Investment Performance February 2018

Investment Performance February 2018

February 2018 was not a good month for investment returns. In my view, four things led the market to crack:

  •  Imposition of LTCG on equity in the Union Budget. Totally unnecessary tax in my opinion, which was a huge sentiment burster for markets.
  •  A sharp rise in commodity prices, as well as a sharp drop in Unemployment in developed economies, which portends the return of inflation, rise in interest rates, and diversion of funds to debt markets from equity markets
  •  Loss of key byelections by the ruling party, which made the return path of Narendra Modi in 2019 somewhat hazier.
  •  The Nirav Modi-Mehul Choksi Scam which did so many things-it totally destroyed whatever faith was left in PSU Banks, it was a huge whammy for the reputation of the NDA regime, and a huge blow to middle class morale.

Whatever the narrative may be, and you can believe or not believe any of the above, markets nevertheless fell, and sharply. The Bank Nifty, which was up about 7.2% in January 2018, fell by more than 8% in February. Mutual funds like HDFC Top 200 fell sharply. A PMS like Motilal Oswal did not do so badly, since it was invested primarily in ‘quality stocks’.

My investment performance, like always fell somewhere in the middle. Nevertheless, if Iook at performance over a year, I outperformed all the benchmarks, except the SBI Small and Midcap Fund.

In portfolio changes, I again spent some effort to prune my portfolio. Again, the timing was quite wrong, and it still makes me wonder about my psychological strength in coping with market rises and falls. Again the net implications are small (less than 1% of portfolio size). Nevertheless, the timing is certainly off.

The investment performance is summarized in the graph and table below. Click on them for a zoom view.

Investment Performance
Investment Performance February 2018 compared to various benchmarks
February 2018
Investment and Trading Returns February 2018

Trading Performance January 2018

Trading Performance January 2018

After  a dismal few months, trading returns looked up in January 2018. A single month return was more than 50%, though it was a bit due to the fact that capital had been depleted because of the losses of the previous months. Nevertheless, that meant that for the year, we were now back to triple digit returns, which is great.

Trend following traders live for such periods, where markets trend strongly. In January, the Bank Nifty increased by 7.2%, which was simply great. It also meant that our trend following systems had a great performance.

Here is a tabular representation of the Trading returns for January 2018:

Trading Performance
Investment and Trading Performance in January 2018

Investment Performance January 2018

Investment Performance January 2018

January 2018 was an eventful month for investment. The first half saw the midcap and smallcap indices at all time highs. This also propelled my portfolio to all time highs.  My portfolio saw an all time high on January 11, 2018. After that the whole month of January 2018 was downhill and indeed, 31st January 2018 was also the low for the month for the portfolio.

It is to my dismay that I realized that I was buying stocks (albeit in small quantities) throughout January. In my defense, I was not buying expensive stocks-I was buying Muthoot Finance, Aarti Industries and Equitas Holdings (based on a Moneylife recommendation). Nevertheless, there is some foolishness in buying stock when markets are at all time highs or just below that. It is of small comfort that my total buying was not more than 1% of my portfolio. It is the psychological aspects of the purchase which troubles me.

Here is my investment performance as measured against other benchmarks:

Investment Performance
Investment Performance compared against different benchmarks

As can be seen from the graph and the table below, inspite of the rise and fall of the market in January 2018, my portfolio did not really move in the month, even though intra-month there was quite a good gap. The Centrum PMS did surprisingly well for the month, and I really can’t understand why. Nevertheless, except for SBI Small and Midcap fund (despite underperformance during the month), my investments did better than the other benchmarks.

Trading Performance
Investment and Trading Performance in January 2018