In this article, we give a brief introduction to Prisma’s Momentum indicator and then examine its potential, benefits, and performance.

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The Momentum indicator is trend-based and can be used to determine when a selected market or underlying is losing momentum (i.e. showing a downward trend) over a variety of time horizons. Unlike some Prisma indicators such as the Credit indicator or the Vega indicator, which are calculated on the basis of specific data and do not depend on the underlying asset under investigation, the Momentum indicator quantifies the dynamics of the asset under consideration independently of economic and financial conditions. It can therefore be used for investments in a specific sector or asset.

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The Momentum indicator observes a relatively large time window in order to distort the trend of an asset as little as possible. The indicator can be very effective when a downward trend occurs without a real panic movement. For example, the Momentum indicator may show very high risk for one asset while showing low risk for another. Below are the historical results of the Momentum indicator for the S&P 500 Index and the STOXX 600 Index from January 2000 to August 2022. We see that the timing is not the same as the underlying indices have different dynamics.

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Let’s look at another example of applying the Momentum indicator to an asset that has a very special dynamic due to its high volatility: the NASDAQ-100 index. The chart below shows the performance of the NASDAQ-100 index between January 1999 and June 2022 compared to a strategy where it is timed with the Momentum indicator.

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The advantages and limitations of the Momentum indicator can be illustrated very well graphically. Choosing a medium-term time frame for analysis and decision-making avoids long downturns like the one between 2000 and 2003. It is also not influenced by short-term upswings followed by equally strong downswings during this period. The downside of such an indicator can occur during bull markets when misinterpretation can lead to a bleed that slightly reduces the performance of the underlying. Nevertheless, the added value of this indicator makes it a very useful indicator in the event of a prolonged bear market.

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The statistics confirm these qualitative observations. The Sharpe Ratio of the NASDAQ-100 index doubles, while the maximum drawdown of almost 83 % is reduced by half. This indicator thus stabilises this asset to a great extent, making it more reliable and providing more regular returns, while maintaining an average exposure of 76%.

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Below is the performance of the Momentum indicator during the largest drawdowns experienced by the NASDAQ-100 index. This table shows the great stability of the Momentum indicator and its ability to drastically reduce the magnitude of these drawdowns.

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To better understand the dynamics of the Momentum Indicator qualitatively, we can look at its development from January to July 2022.

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We see that despite its inertia, the Momentum indicator proves to be valuable in long-lasting downtrends and can perform much better in these phases. Moreover, such trends are very difficult to analyse with more granular signals. For this reason, the Momentum indicator has its place alongside other, more reactive signals. We invite you to discover more periods and performances of the Momentum indicator on Prisma.

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Disclaimer:

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This content is advertising material. This content as well as all information displayed on Prisma or any of Alquant’s websites does not constitute investment advice or recommendation, and shall not be construed as a solicitation or an offer for sale or purchase of any products, to effect any transactions or to conclude any legal act of any kind whatsoever. Past performance is not a guide to future performance.