Dual Momentum Equity

Thesis (edge)

Equity markets exhibit momentum. When 12-month equity return is positive and exceeds the return of bonds (AGG), stay in equities; otherwise switch to bonds or cash. This captures trend and avoids prolonged drawdowns.

Where it works (regimes)

Works best in trending regimes. Underperforms in choppy, mean-reverting markets. Strong historical performance in the US; international variants need separate testing.

Signals (notation)

• ( r_{12}(SPY) ): 12-month total return of SPY
• ( r_{12}(AGG) ): 12-month total return of AGG
• Long SPY if ( r_{12}(SPY) > 0 ) and ( r_{12}(SPY) > r_{12}(AGG) ); else long AGG (or cash).

Portfolio construction

100% in either SPY or AGG (or cash). No leverage. Rebalance monthly on a fixed date.

Risk model

Tail risk: equity drawdowns when momentum flips late. Stress: 2008-style crash: momentum turns negative after the fact. Consider vol targeting as overlay.

Costs & implementation

Low turnover (~1–2 switches per year). Slippage and spread on rebalance. Use limit orders; avoid trading at open/close if possible.

Failure modes

• Whipsaws in sideways markets.
• Lag after regime change (momentum is backward-looking).
• Single-asset concentration (equity or bond only).

Variants

• v1: Cash instead of AGG when not in equities.
• v2: International dual momentum (MSCI World vs global bonds).
• v3: Vol-scaled position size (e.g. target 10% vol).

Our Notes & Suggestions

Use total return (including dividends) for the 12m calculation. Align rebalance date with your broker’s free-trade cycle to minimize costs. Backtest with realistic execution assumptions.