Single Momentum Investing

Single Momentum Investing (SMI) is one of our simplest investment strategies. Like most strategies, this is a trend following strategy. Trend-following strategies are based on the finding that throughout the different stock market cycles, the chance that a trend will continue is greater than the chance that the trend will reverse.

For our back tests we start with a cash amount of 100 ($, €,…). Calculations are made with the adjusted closing price (hereafter simply referred to as the closing price). With SMI, we compare the closing price of the previous trading day with the closing price of x number of days earlier on each trading day. We call this “x number of days” the interval. The closing price on that day is the reference price. If the price of the past trading day is higher than or equal to the reference price, we buy the ETF or keep the ETF. If the closing price of the previous trading day is lower than the reference price, we will sell the ETF or we remain in cash. For these tests, the buy or sell price is the closing price on the relevant trading day.

We will make an estimate of the impact of transaction costs and we will answer the question whether following up your investments daily is necessary to obtain the best results.

In the last part of the analysis of the SMI strategy we will perform out-of-sample tests. For these tests we calculate the optimal interval for a period in the past. Next we apply this optimal interval in the subsequent period and calculate the return and maximum breakdown. These out-of-sample tests will give us an indication of the predictive value of the applied strategy.

The results with different ETF’s or indexes can be found under these links:

SMI S&P500