A reader of my blog, Matt B., commented recently on an old post I’d written about momentum bursts. Like me, Matt was intrigued by the short 3 to 5-day momentum bursts he saw described time and again on Pradeep Bonde’s stockbee site. Those bursts look so pretty, so elegant, and more to the point: so profitable.
In a recent blog post, I rather glibly stated that the market tends to revert to a mean. A reader called me out about the time frame I was using, which raises a good point. A market can tend toward both mean reversion and momentum over different time frames. Many traders would argue that different markets show different characteristics over specific time frames, and that these characteristics are persistent. Continue reading Momentum and Mean Reversion in Different Time Frames
You look at the last ten days of trading. If the market at the closing bell is up from the market close of 10 days ago, you buy at the next open. You hold for 10 days, then sell at the next open. A classic momentum play. Wash, rinse, repeat. And remember, you have that uncle who owns a brokerage, so you don’t have to pay commissions. Start with $1000, invest as much as you can each time, and compound that puppy. Here’s what that system would get you with SPY since its inception:
I was reading a blog post today about the ‘best’ way to catch a momentum breakout, and it got me thinking. Most systems that trade a breakout reference volume. “Only trade a breakout that has a sharp increase in volume” and that sort of thing.
Whenever I look at these systems however, I don’t seem to find any breakouts that don’t have higher volume. From my non-scientific survey, high volume seemed to be a prerequisite for a price breakout. The idea of a breakout without higher volume seems, well, weird and unlikely.
So is volume important for breakouts? Let’s do the numbers.
I took a look at the period from Jan 1 2010 through Oct 13th 2015. I looked at the current list of Russell 3000 stocks (I don’t see a need to look at delisted stocks, or those that were part of the list at the time of trade, because this isn’t a backtest).
I defined my breakout as:
• Where the close was at least 5% higher than the close of the previous day.
• The previous day was not a breakout day.
• The median 21-day volume was greater than 100,000 and the closing price was greater than $15. This is to ensure liquidity.
This is a very simple definition of breakout, with no massaging for long term momentum or anything else.
I calculated the return starting at the open of the following day, through the close 5 days later.
I then divided my data into two parts: those breakouts that traded on less volume than the day before the breakout, and those that traded with more.
Surprisingly, 23% of these breakouts were accompanied by a drop in volume from the day before. And here I didn’t think these even existed! 7124 instances out of 31,010 total.
So what’s the average gain or loss when comparing reduced-volume breakouts vs increased-volume breakouts?
Vol decrease from day before:
win rate: 48.9%
Vol increase from day before:
win rate: 50.3%
So it looks like it matters a tiny bit.
Then I wondered, does more volume improve the results? I examined the returns from only breakouts that had a 50% increase in volume (i.e. 1.5X), 100% and 200%. Here are the gain/loss averages and the win rates:
There does not appear to be a coherent pattern here. Increasingly higher volume does not yield increasingly higher returns. And the gain/loss average is so close to zero that I’m not sure filtering by volume increase is worth the trouble.
Volume spikes may have some value, but I’m not seeing it here. I think the next step is to construct a slightly more elaborate set of parameters. I’m thinking a simple trend filter, and comparing the breakout volume to a moving average of the volume. Stay tuned…
P.S. I’ve been quiet lately because I haven’t had any new ideas. I’ve been trading some mean reversion ideas, but mostly keeping my head down.
Where have all the momentum bursts gone?
One of the systems I trade relies on catching short-term momentum bursts, usually lasting three to five days. It’s similar to Pradeep’s momentum-burst strategy (here), but since I don’t have his exact system, I’ve reverse-engineered it and come up with my own variations.
Without boring you on the specifics, I’m looking for stocks with long-term momentum, a medium-term history of previous bursts, and a pullback and low-volatility pullback from a recent major high. Ideally I catch the burst when it happens, and stay in the trade for just a few days.
The lead image gives an idea of what these look like.
Recently I started wondering where all the momentum bursts have gone. And then wondered if they had actually gone anywhere at all. Time to crunch the numbers!
For this, I needed delisted stocks as well as current stocks. So I’m using the entire US stock universe from 2000-2015, NYSE and NASDAQ, listed and delisted stocks.* Anything was a candidate that had a historical (i.e. not adjusted for splits etc) closing price > $2 and a 10-day median volume greater than 50,000 shares. All bursts that were > 5% from open to close were included in the data.
I first looked at the monthly momentum-burst totals dating back to 2000, to see if there were any anomalies:
Near the end of 2014, you’ll see there were a few months with no bursts, as well as January of this year, and July (so far). The previous periods that had zero bursts per month seem to coincide with major bear markets or corrections in the past. But February through June of 2015 look pretty normal. Not high, but close to the EBA (“eye ball average”). So that doesn’t really help.
Well how about the quarterly averages? Were Q1 and Q2 of 2015 abnormal in any way?
Q1-2015 had 12 bursts, and Q2-2015 had 14 bursts. A little below average but not crazy-low in my opinion. Hmm, what about averages per calendar month? Do some months show bursts more than others? Ok let’s dig in…
Ah hah! Perhaps there’s a seasonal component. July is, on average, the second-worst month for momentum bursts. That might explain why we haven’t seen any real breakouts this month (at least based on the specific parameters used in my scanning code). And March of this year was unusually high, with a total of 10 bursts. The rest of the months so far in 2015 were below average.
So what does this tell me? That yes, momentum bursts are on the low side, although there have been much worse periods in history. And also I shouldn’t expect too much of July in general. Perhaps I should not bother trading the system until August rolls around? We shall see!
*yes I did finally break down and pay for delisted stock data as well. No more survivorship bias for me!