Tuesday, June 11, 2024

Unlocking the Power of Trend Following and Relative Strength: A Century of Outperformance

 Reducing Drawdowns and Maximizing Returns

Trend following and relative strength works. The latest research by Gary Antonacci and Carlo Zarattini, delving into almost 100 years of data, proves conclusively that when done correctly, market timing results in significant outperformance and, more importantly, drawdown reduction. Most investors get blinded by the “outperformance” and forget that the best offense is a good defense, namely, cutting your losses short.

Below is the executive summary provided by one of its authors on LinkedIn, Gary Antonacci (emphasis added by me):

This study delves into the profitability of a simple, low-frequency trend-following model applied to US industries using a comprehensive database of all US stocks traded between 1926 and 2024.

Over the past century, the Timing Industry portfolio achieved an average annual return of 18.5% with an annual volatility of 12.1%, resulting in a Sharpe Ratio of 1.46. This starkly contrasts the US equity market’s 9.7% return, 17.1% volatility, and 0.63 Sharpe Ratio.

In the paper’s final section, we introduce 31 sector ETFs by State Street Global Advisors and backtest the same trading methodology over the past 20 years. The ETFs successfully replicate the model’s exposure and returns.

We also assess the impact of commissions and slippage, demonstrating that the active timing strategy remains largely profitable even with high trading costs.”

Here is the link to the research article, which is worth your time:



Manuel Blay

Editor of thedowtheory.com

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