Traders and investors can use a simple momentum strategy as a benchmark to gauge the effectiveness of macroeconomic and discretionary technical analysis. It is a simple strategy, but it has proven to be quite robust.
Despite its simplicity, it is unlikely that most macroeconomic and discretionary technical analysts will outperform this difficult-to-beat strategy over sufficiently long time periods.
The backtest below shows the performance of the simple 12-month price series momentum in the SPY ETF from inception to February 10, 2025: buy on the next open when the price is above the average and sell on the next open when it is below.
Despite a 13% loss in 2022, this simple strategy recovered, and equity rose to new highs.
The annualised return is 9.6%.
The maximum drawdown is 22.6%.
The volatility is 12.8%.
The maximum drawdown is less than half of that of buy and hold.
Beta is about 0.5.
The Sharpe ratio is 0.75.
The strategy could suffer large losses under specific market conditions, but until now, it has performed relatively well. It can serve as an excellent benchmark for unleveraged macroeconomic and discretionary technical market analysis.
Many macroeconomic and technical analysts use leverage. Especially after the advent of thematic ETFs, it is easy to “hide” leverage. Many new ETFs use index futures, as well as other leveraged ETFs, to increase leverage. The performance of this simple strategy with 2x leverage is shown below.
The table below summarises the performance of these simple unleveraged and leveraged benchmarks, comparing them to SPY ETF buy and hold.
The simple 12-month, long-only momentum strategy provides a formidable benchmark for discretionary macroeconomic and technical market timers, particularly for those who use leverage. This strategy is our definition of robust.
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There are strategies with improved risk-adjusted or even absolute returns for both traders and investors. For individual strategy packages, you’ll find more information below.
