Strategies · Library · Stocks
§3.7Trend
Residual momentum
Like price momentum, but each stock's returns are first cleaned of the part explained by market, size and value factors. Ranking on what is left aims to reward stock-specific trends and avoid riding broad market swings.
Open in the builderAs a long-only proxy; see how ARCANE uses it.
- Asset class
- Stocks
- Held for
- Months
- Data
- ARCANE has part of the data
- Symphony
- Builds as a long-only proxy
The rule
- Signal
- Past-year return residuals from a regression on market, size and value factor returns, scaled by their own variability.
- Entry and exit
- Estimate betas over three years, score the last year skipping the latest month; rebalance monthly.
- Sizing
- Equal or volatility-scaled; long top decile, short bottom decile.
How it fails
- Regression estimates are noisy
- Needs factor return series
- Turnover costs
- Short leg needed
Data it needs
- daily prices
- Fama-French factor returns
Stock prices and a market proxy exist; the size and value factor series are not in ARCANE's data.
How ARCANE uses it
A Call that a stock's strength is its own rather than the market's could use the idea as a comparison against SPY.
Builds as a long-only proxy. Approximate by ranking tickers on return minus SPY return over the window and keeping the top N; factor regression and shorts are lost.
Filed under the trend card
Hold each market in the direction of its own return over the past year, and size every position to the same expected volatility.
A paper plan from this card holds 21 to 252 days, stops at 2× the expected move and uses at most 100% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §3.7, p. 45 of the SSRN version. Described in our words. Trend is ARCANE’s filing, not the book’s.