Update Q4 2020; Toxic waste rally

Trading Portfolio; Momentum

Update Q4 2020; Toxic waste rally

Beat the S&P 500 index using momentum

Holland Park Capital London Ltd has developed a proprietary quant screen that uses momentum to invest in stocks. On the 1st of July 2020 (the start of Q3) the strategy started with a start value of $50000. The Trading Portfolio; Momentum strategy went live then trying to beat the S&P 500 index with the momentum signal. Rebalancing is quarterly. It is the beginning of Q1 2021 now so it is time for an update of Q4 2020 before the portfolio is rebalanced again.

The Trading Portfolio; Momentum had 232 small positions in S&P 500 stocks in Q4 2020. The received dividends have been taken out at the end of Q4 2020. At the beginning of Q1 2021 the momentum portfolio looked like below pictures from the broker;

Q4 was a good time for the absolute return of the momentum portfolio. It can best be described as a “toxic waste rally” after the US election and the vaccine news. Other people might call it a “dash for trash”. Whatever you call it; animal spirits, greed and fear of missing out were the name of the game in Q4 2020. The S&P 500 index managed to make an all time high in January 2021. The Nasdaq composite index also made an all time high in January 2021. The Dow Jones Industrial Average Index also made an all time high in January 2021. Even the US Russell 2000 index made an all time high in January 2021. A new US stocks bull market cycle began in the second halve of 2020. Bitcoin’s meteoric rise was a sign that central banks around the world have unleashed another round of asset price inflation by expanding their balance sheets. The Yardeni website keeps a good track of this.

As Figure 2 shows the central bank’s total assets have gone up even more aggressive now than in 2008. This is quite astonishing really. Figure 6 shows the correlation with the S&P 500 index.

FINRA data showed the total margin debt was $722 billion in November 2020. That was a new record high, beating the previous peak of $669 billion of May 2018. The margin debt proofs investors are greedy at the moment and animal spirits have been unleashed again.

Usually the toxic waste rally happens at the end of a recession so the US is probably out of the recession by now.

How has the relative return of the Trading Portfolio; Momentum been so far?

As an investible benchmark the Vanguard S&P 500 ETF (VOO) had been chosen. VOO can be expected to have a tiny underperformance versus the S&P 500 index, but at least is a real investable option for private investors. $50000 was invested on paper on the close of June 30 in the VOO. That paper trade has been put in two portfolio tracking websites.

As of the middle of January 2021 on the Stockrover website the VOO paper portfolio looked like below;

As of the 17th of January 2021 the Sigfig portfolio tracking website looked like below.

Was the relative performance of the momentum portfolio versus the VOO exchange traded fund (ETF) since the start (ignoring dividends) any good?

So the relative performance in Q3 and Q4 2020 was not good. The Trading Portfolio Momentum has some catching up to do in 2021 with the VOO Stockrover paper portfolio and the VOO Sigfig paper portfolio. That being said the toxic waste rally could have done more damage to the momentum portfolio. Hopefully the Trading Portfolio Momentum will be able to leave the 2 paper portfolios in the dust at the end of Q1 thanks to the next rebalance.

The S&P 500 index is probably around 2.4% ahead of the VOO paper portfolio and ahead around 2.8% versus the Trading Portfolio; Momentum. This is where the real catch up needs to take place by the Trading Portfolio; Momentum in 2021.

Here are the top 10 holdings of the Trading Portfolio; Momentum in Q4 2020 before the Q1 2021 rebalance from the broker;

Hopefully you liked the blog. The blog is not advice on what you should do with your money and the blog was written for information purposes only. This blog helps Holland Park Capital London Ltd in writing down and keeping track of the Trading Portfolio; Momentum experiment. When you invest in the stock markets it is very possible to lose money. Please do your own research. If in any doubt what is best in your individual situation, please hire a licensed financial advisor. Good luck on your investment journey.