Research Links on Relative Strength

Dec 08, 2010 in Relative Strength

Some links to published research on various forms of relative strength concepts. The concept is over a century old. (I am not aware of any studies that involve ETFs directly -- let us know if you know of one). Copy-paste URL into browser.


Abstract from paper #1 above 'Time Series Momentum':


"We document significant "time series momentum" in equity index, currency, commodity, 

and bond futures for each of the 58 liquid instruments we consider. We find persistence 

in returns for 1 to 12 months that partially reverses over longer horizons, consistent with 

sentiment theories of initial under-reaction and delayed over-reaction. A diversified 

portfolio of time series momentum strategies across all asset classes delivers substantial 

abnormal returns with little exposure to standard asset pricing factors, and performs best 

during extreme markets.  We show that the returns to time series momentum are closely 

linked to the trading activities of speculators and hedgers, where speculators appear to 

profit from it at the expense of hedgers.  "




Comments (3) -

Dec 11, 2010 07:04 #

I highly recommend the book SMARTER INVESTING IN ANY ECONOMY by Michael Carr (published 2008), which is an in depth and evidence-based analysis comparing a half dozed relative strength strategies using about 25 years of data from the Fidelity sector mutual funds. As with ETF Replay he includes a good analysis of the value of taking volatility into consideration when creating a relative strength ranking formula, though is use of volatility is different.

Carr did come up with a powerful risk-reduction idea I which I would suggest ETF Replay consider adding to this website. Carr starts by noting that there are times when, due to the change in market conditions, almost any strategy will under perform for a period of time, or even stop performing all together.  The question then arises, how can we define strategy performance in a way that gets allows us to stop using it when it is losing money, and get back in to using it when it is making money again? His elegant and simple solution is to track a moving average on the equity curve itself. When the equity curve falls below its moving average we go to cash (or some other strategy). But we continue to plot the equity curve as if we were still investing with it. Once the equity curve goes back above its moving average we start using the relative strength strategy or portfolio again. Carr suggested the moving average be from 30 to 50 periods long. In the study he did, Carr writes
Profits increas by nearly 79 percent with the filter. This improvement in performance also virtually eliminates drawdowns. . .". (Page 133)

Jim United States

Dec 16, 2010 07:37 #

Hi Jim,

I will write on this topic at some point soon to expand the discussion.   What Carr is addressing is really important -- and this goes into the very nature of financial time-series analysis.   These are relatively advanced quant concepts but if people are interested, that is definitely a discussion worth having.

Chris United States

Jan 17, 2011 11:47 #

I'd love to see more writing on this subject, esp money managment/volatility.

I know that Fabian had a fidelity rotation newsletter like 15 yrs back.  

Also there is a guy named Vomund who uses a fairly simple RS rotation.  He wrote a book, his results are on the web.

Finally, any plans to add an 'optimize' tool for backtesting?  I realize this is counter to your philosophy of playing with your site, but I'd love to be able to kick out a table of risk/reward/results.

Great site.  Finally - any plans to offer a 1 yr discount sub?  AT.

arbtrader United States

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