The weekly market reports include a market position update, a stock market forecast, and an analysis of capital markets. To access the full report, you must subscribe to Premium Articles, Weekly Premium Articles, or an All-in-One subscription.
Included in this report:
- Year-to-date performance
- Weekly summary.
- Update on market positioning.
- Stock market forecast.
- Capital markets update.
1. Year-to-date performance
We use two long-only cross-sectional momentum strategies to generate signals for capital markets and factor ETFs. See Section 3 below for open positions and signal updates.
Year-to-date, the weekly strategies are up 26.8% (equal allocation, no leverage) versus a gain of 23% for the SPY ETF. Gold (GLD) is up 32.5% year-to-date. Tech stocks (QQQ) have gained 21.5%. The US dollar index (UUP) is up 8.1%, and long-duration bonds (TLT) are down 4%.
Despite the high correlation between the ensemble (weekly report) of the two momentum strategies and the stock market (SPY), a few brief periods of outperformance account for the higher return. The strategy’s beta over the last 10 years is about 0.45.
2. Weekly Summary (October 21–October 25, 2024)
- Stocks ended the week lower due to disappointing quarterly earnings.
- Large-cap stocks (SPY) fell 0.9% and erased the previous week’s gains.
- Gold (GLD) gained 0.8% and ended the week near all-time highs.
- Long-duration bonds (TLT) fell 1.8% due to worries that a stronger than expected economy will delay interest rate cuts and inflation could rise.
- Commodities (DBC) rebounded as energy and precious metals gained. See Section 5 for more details.
- Forecasts of slower rate cuts helped the US dollar index (UUP) end the week higher by 0.9%.
- Since January 3, 2022, bonds (TLT) have been down 32.2%, while gold and large-caps (SPY) have gained 48.2% and 27%, respectively.
- For the week, the equally weighted magnificent seven stocks index rose 3.6%. TSLA surged 22% on strong earnings, and NVDA was up 2.6%.
- All market sectors fell this week, except for consumer discretionaries (XLY), which gained 0.7%. The materials sector (XLB) fell the most, by 3.8%.
- Year-to-date, utilities (XLU) are up the most, by 29.9%, while energy (XLE) has risen the least, by 9.7%.
- The US Dollar Index (UUP) is in overbought territory.
A Random Walk
Below is an excerpt from our recent article Data Mining, “Momentum Monkeys”, and Survivorship-Free Data:
In his best-selling book A Random Walk Down Wall Street, Burton Malkiel claimed that a monkey wearing blinders and throwing darts at a newspaper’s financial pages could choose a portfolio that would perform just as well as one put together by financial analysts.
According to the random walk theory, market timing is inferior to buying and holding securities because price action is unpredictable and reflects all available information.
One of the main criticisms of the random walk theory is based on the existence of the momentum anomaly. However, as we demonstrate in our previously quoted article, the momentum anomaly, while still persistent to some extent, has worse risk-adjusted performance than buy-and-hold, raising the possibility of a market regime change.
Since momentum and its version, known as trend-following, have a huge optimization space, there is a large dispersion in risk-adjusted performance depending on the strategy or strategies used. Since markets are not a pure random walk but a random walk with a drift, a suitable ensemble of strategies trading uncorrelated or low-correlated markets has higher odds of generating superior risk-adjusted returns but lower odds of outperforming the stock market buy and hold.
However, large and more frequent corrections have tainted the stock market buy and hold performance over the last 30 years. Buy and hold volatility is too high for the risk aversion profile of most conservative investors. Therefore, investor demand for improved risk-adjusted performance led to the emergence of hedge funds and alternative investments.
There are those who are still insisting that traders and funds cannot beat buy and hold, but these are naïve accounts mainly by people who lack the actual experience of investing during devastating bear markets. Those who have the experience seem to prefer a lower annualized return than what the market can offer but at significantly lower volatility, i.e., a higher Sharpe ratio.
There are also some who perceive large corrections and bear markets as opportunities to add to positions, but those represent a small fraction of the market participants and could be classified as gamblers due to using a popular gambling risk adjustment method.
As technology advances and artificial intelligence is used for trading and investing decisions, the importance of strategic and tactical allocations will increase, and hedge funds may attract more capital at the expense of passive investing, which will face even higher volatility in the future.
3. Update on market positioning
We use two cross-sectional momentum long-only strategies that generate signals for capital markets and factor ETFs.
The most recent update occurred on Friday, October 25, 2024, following the close of the market. The year-to-date, equally weighted performance is 26.8%. Below are the open positions and new signals.
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Specific disclaimer: This report includes charts that may reference price levels. If market conditions change the price levels or any analysis based on them, we may not update the charts. All charts in this report are for informational purposes only. See the disclaimer for more information.
Disclaimer: The Weekly Market Reports are provided for informational purposes only and do not constitute investment advice or actionable content. We do not warrant the accuracy, completeness, fitness, or timeliness for any particular purposes of the Weekly Market Reports. Under no circumstances should the Weekly Market Reports be treated as financial advice. The author of this website is not a registered financial adviser. Before subscribing, please read our Disclaimer and Terms and Conditions.
Charting and backtesting program: Amibroker. Data provider: Norgate Data
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