Momentum investing is based on the idea that stocks that have performed well in the past tend to continue performing well, while underperformers tend to keep lagging. There are two primary types of momentum:
Absolute Momentum, which looks at a stock’s past returns to determine whether it has had positive or negative momentum.
Relative Momentum, which ranks stocks against each other to identify the best performers relative to their peers.
Most momentum strategies use only one of these approaches.
Prophet takes advantage of both.
Step 1: We Calculate Absolute Momentum
Measure a stock’s past return over a period that we have measured as optimal.
If the return is positive, the stock is considered to have absolute momentum.
If negative, the stock is considered to have no absolute momentum and is typically excluded from selection.
📌 Why it matters: This step filters out stocks in an overall downtrend.
Step 2: Then We Calculate Relative Momentum
Rank stocks relative to each other based on their past returns.
Select the top X% (e.g., top 30%) of the highest-performing stocks.
📌 Why it matters: Among the stocks with positive momentum, this ensures that only the strongest performers are selected.
Step 3: Next, We Top and Tail It
After 16 years of real-time testing (no back-testing at MyWallSt), we’ve figured out a few other parameters to maximise returns, such as a minimum market cap.
📌 Why it matters: We want to find stocks that you can buy 99% of with your everyday online brokerage account.
Step 4: Finally, We Construct the Portfolio
Invest only in stocks that meet both criteria:
Have positive absolute momentum (Step 1)
Are in the top X% of relative momentum (Step 2)
Regularly rebalance (e.g., monthly or quarterly) to update selections.
By combining absolute and relative momentum, Prophet achieves the following benefits:
✅ Reduces downside risk – Absolute momentum acts as a trend filter, avoiding stocks in an outright downtrend.
✅ Enhances returns – Relative momentum ensures only the strongest performers are included.
✅ Improves Sharpe ratio – The strategy delivers higher returns per unit of risk compared to traditional momentum strategies.
✅ Diversifies across stock classes – Can be applied to stocks, bonds, commodities, or global indices.
Imagine you are constructing a global equity portfolio using Prophet:
Calculate Absolute Momentum (Time-Series Momentum)
Check if major indices (e.g., S&P 500, MSCI Emerging Markets, FTSE 100) have positive past 12-month returns.
If an index has a negative return, exclude it.
Calculate Relative Momentum (Cross-Sectional Momentum)
Among indices with positive returns, rank them based on performance.
Select the top 30%.
Build the Portfolio
Allocate funds only to the strongest-performing indices with positive absolute momentum.
Rebalance monthly or quarterly.
Research shows that Prophet outperforms traditional momentum strategies by delivering higher risk-adjusted returns. Backtests indicate:
Higher Sharpe ratios than simple relative or absolute momentum alone.
Lower drawdowns, particularly in bear markets, due to absolute momentum filtering out weak stocks.
Stronger long-term returns, as it avoids trend reversals more effectively than cross-sectional momentum alone.
Equity Investing – Select stocks based on both absolute and relative momentum.
Stock Allocation – Use Prophet for a global stock-bond rotation strategy.
Sector & Factor Investing – Identify the strongest-performing sectors or factors while filtering out weak ones.
Cryptocurrency & Commodities – Apply Prophet to crypto markets or commodities to enhance trend-following strategies.
Prophet builds on traditional momentum investing by filtering out weak stocks before applying relative strength rankings.
The result? Higher returns, lower risk, and better consistency.