Sunday, May 07, 2023

Revisiting the Momentum Curve: Anticipating Market Turns

Back in 2014, I wrote about the Momentum Curve and how it is useful in visualizing market breadth and strength/weakness across different time frames.  It's almost nine years later and I have maintained the Momentum Curve database.  The dataset goes back to 2006 and captures the percentage of stocks in the SPX universe that are above their 3, 5, 10, 20, 50, 100, and 200-day moving averages.  I then look at what the market did going forward, from 1 to 50 days, following various configurations of the curve.

In June, I will be participating in my first webinar in quite a while, as part of the TraderLion conference.  The session will be a group coaching session, in which attendees can bring in their questions and challenges and I will respond with best practices in evidence-based psychology and among successful portfolio managers.  Preceding the coaching session, I will review the Momentum Curve and its application to the present market.  This will offer a nice illustration of how quantitative analyses can great aid our discretionary trading judgement.

As it happens, we recently (on Thursday) hit a point at which fewer than 40% of stocks were trading above their 3, 5, 10, and 20-day averages.  Out of over 4200 days in the database, this has occurred 621 times.  Over every forward time frame, from 1 to 20 days out, the market has--on average--displayed superior returns.  For example, the average next twenty-day return following the oversold occasions has been +1.42% vs. +.55% for the remainder of the sample.  Indeed, we did see a nice trend day higher on Friday.

As the initial article indicates, these analyses provide hypotheses, not firm conclusions.  If we observe a strong historical tendency for a move and then current market behavior follows that tendency, we have the possibility for a trade with the proverbial wind at our back.  I'll offer other examples and applications in the webinar; stay tuned!

Quick update (5/11/23; 9:27 AM ET) - The bounce in the market since the historical study posted above has been choppy at best with very mixed breadth.  If a historical tendency doesn't play out, it's important to ask whether something is making the current situation different or unique.  I'm struck by how few market participants I speak with are taking the prospect of U.S. debt default and large, it's not on their radar.  With only two percentage points standing between the former and current U.S. Presidents; the former President speaking favorably about default; and a Speaker who owes his position to supporters of the former President, could we be in for a constitutional crisis?  I find it important to ask questions and use what-if scenarios for trading and financial planning.


Further Reading:

The Psychology of Quant Analysis

Using Breadth to Track Market Cycles