Forecasting trends is impossible. Identifying and following trends is possible and can be highly lucrative. Trend Following and Legacy Momentum Approaches are some ways in which trends can be identified. However, they are not without their pit-falls. Trend Following systems, while quick to identify trends, tend to be erratic & unreliable in volatile markets, result in high turnover and be ineffective at the portfolio level. Legacy Momentum approaches, usually based on 6 or 12-month momentum, while stable can result in late identification of trends potentially giving up six months of price appreciation. Late exits can also result in giving back a huge portion of our profits.
Trendrating’s Smart Momentum Analytics was designed to address these disadvantages. It utilizes a multi-factor approach to quickly and reliably identify trends. It is easily implemented at the portfolio level and works excellently as an over-lay on most fundamental approaches.
Below, we will analyse the best and worst performing stocks in the EuroStoxx 600 index. We will determine how effective Trendrating’s Smart Momentum approach was at identifying the most meaningful trends in this European index.
First we will look at how Trendrating performs with positive trending securities
Table 1 below summarizes the performance in 2015 of the Best performers in the EuroStoxx 600 Index
Table 1: EuroStoxx 600 2015 Best Performers.
The Total Gain column measures the total gain in each stock from its 2015 low to its close price on January 7, 2016. As you can see, on average, these stocks had an average return of over 125% during this period. This compares with an index performance of just under 4%. Trendrating Smart Momentum approach was able to capture about 84% of this upside on average.
We have seen that the model works well for stocks with positive momentum. How does it do for stocks that are Trendrating negatively? Does it help protect profits? Is it an effective risk management tool?
Table 2 below summarizes the performance in 2015 of the Worst performers in the EuroStoxx 600 Index
Table 2: EuroStoxx 600 2015 Worst Performers.
On average these stocks had a return of -53% for the period. As you can see, on average Trendrating was able to capture almost 82% of the downward move, warning investors early enough to protect the vast majority of their profits.
We have seen that Trendrating’s Smart Momentum analytics can quickly and reliably identify positive and negative trends ensuring that for the discerning investor, the Trend can really be your friend!
Timing on some bad performers:
Timing on some good performers: