Momentum investing is based on the idea thatstocks that have performed well in the past tend to continue performing well, whileunderperformers tend to keep lagging. There are two primary types of momentum:
Absolute Momentum, whichlooks ata stock’s past returnsto determine whether it has had positive or negative momentum.
Relative Momentum, which ranks stocks against each other to identify thebest performers relative to their peers.
Most momentum strategies useonly one of these approaches.
Prophet takes advantage of both.
Step 1: We Calculate Absolute Momentum
Measurea stock’s past returnover a period that we have measured as optimal.
If the return ispositive, the stock is considered to haveabsolute momentum.
Ifnegative, the stock is considered to haveno absolute momentumand is typically excluded from selection.
📌Why it matters:This step filters out stocks in an overall downtrend.
Step 2: Then We Calculate Relative Momentum
Rank stocksrelative to each otherbased on their past returns.
Select the topX% (e.g., top 30%) of the highest-performing stocks.
📌Why it matters:Among the stocks with positive momentum, this ensures that only the strongest performers are selected.
Step 3: Next, We Top and Tail It
After 18 years oftimely testing(no back-testing at MyWallSt), we’ve figured out a few other parameters to maximise returns, such as a minimum market cap.
📌Why it matters:We want to find stocks that you can buy 99% of with your everyday online brokerage account.
Step 4: Finally, We Construct the Portfolio
Invest only in stocks that meetbothcriteria:
Have positive absolute momentum (Step 1)
Are in the top X% of relative momentum (Step 2)
Regularly rebalance (e.g.,monthly or quarterly) to update selections.
By combiningabsolute and relative momentum, Prophet achieves the following benefits:
✅Reduces downside risk– Absolute momentum acts as atrend filter, avoiding stocks in an outright downtrend.
✅Enhances returns– Relative momentum ensures only thestrongest performersare included.
✅Improves Sharpe ratio– The strategy delivershigher returns per unit of riskcompared to traditional momentum strategies.
✅Diversifies across stock classes– Can be applied tostocks, bonds, commodities, or global indices.
Imagine you are constructing aglobal equity portfoliousing Prophet:
Calculate Absolute Momentum(Time-Series Momentum)
Check if major indices (e.g., S&P 500, MSCI Emerging Markets, FTSE 100) havepositive past 12-month returns.
If an index has anegative return, exclude it.
Calculate Relative Momentum(Cross-Sectional Momentum)
Among indices withpositive returns, rank them based onperformance.
Select thetop 30%.
Build the Portfolio
Allocate fundsonly to the strongest-performing indiceswith positive absolute momentum.
Rebalance monthly or quarterly.
Research shows thatProphet outperforms traditional momentum strategiesby deliveringhigher risk-adjusted returns. Backtests indicate:
Higher Sharpe ratiosthan simplerelative or absolute momentumalone.
Lower drawdowns, particularly in bear markets, due toabsolute momentum filtering out weak stocks.
Stronger long-term returns, as it avoids trend reversals more effectively than cross-sectional momentum alone.
Equity Investing– Select stocks based onboth absolute and relative momentum.
Stock Allocation– Use Prophet for aglobal stock-bond rotation strategy.
Sector & Factor Investing– Identify thestrongest-performing sectors or factorswhile filtering out weak ones.
Cryptocurrency & Commodities– Apply Prophet tocrypto marketsor commodities to enhance trend-following strategies.
Prophet builds ontraditional momentum investingby filtering out weak stocksbeforeapplying relative strength rankings.
The result?Higher returns, lower risk, and better consistency.