We have shifted once again to the 'weak' season of the market. Today, we will evaluate one of the more popular seasonal portfolios - switching between momentum and low volatility.

Monday’s report opened up the start of our update of our market seasonality studies that employ original observations from Yale Hirsch to illustrate how substantive the performance bias has been within the “seasonally strong” half of the year when compared to the "seasonally weak" period. As of the close last Friday (10/31), we ended the seasonally weak period and officially moved into the strong season of the market (November 1st - April 30th). This year, in the “seasonally weak” period the S&P 500 (SPX) produced a return of about 5% the Dow (.DJIA) gained roughly 4% and the Nasdaq (NASD) added 2%.

While the returns during this seasonally weak period weren’t stellar, you were certainly better off being in the market than out of it, this is one of the reasons why we've put forth the concept of a seasonal "tilting" approach that employs factor investing. This is a way to incorporate a long-term, well-documented bias in the market, without resorting to an “all in or all out” strategy that many investors may find unpalatable. This strategy also offers an opportunity to further differentiate yourself within the wealth management space as an expert on investment factors.

Today, we will evaluate one of the more popular seasonal portfolios which combines two complementary factors, momentum and low volatility, via the Invesco Dorsey Wright Momentum ETF (PDP) and the First Trust Nasdaq Dorsey Wright Momentum & Low Volatility ETF (DVOL). When combined, these strategies tend to have a complementary relationship, producing solid long-term returns with a relatively low correlation of excess returns. This combination makes for an attractive US "core" equity solution and a starting point for a seasonal "tilting" strategy.

The basis for our strategy lies in the historical bias that having exposure to the market during the "seasonally strong" six months is a good thing and having exposure to the market during the "seasonally weak" period has often caused more headaches than benefits. Although, the common wisdom does not always apply as momentum had outperformed low vol for several seasonally weak periods until this year.

That said, this strategy looks to overweight the strongest areas of the market during the "seasonally strong" period, and shift the overweight exposure to the more defensive, lower volatility names during the "seasonally weak" period. Specifically, this portfolio holds a 70% allocation to momentum and a 30% allocation to low volatility from November 1st - April 30th, and during the "seasonally weak" six months (May 1st through October 31st), the portfolio switches to 30% momentum and 70% low volatility.

Key Observations:

• Each strategy shows higher cumulative returns than the S&P 500 Index, despite not outperforming every year.
• Buying-and-holding PDP shows the highest cumulative return of any strategy, the largest single-year return of any strategy (104% in 1999), and the worst single-year drawdown of any strategy (-46% in 2008). While it is easy to gravitate to the largest cumulative number, knowing what it takes to arrive at that number is important.
• Combining PDP and DVOL in equal allocations leads to more favorable returns during turbulent market environments for momentum such as 2000-2002, 2008, and 2021-2022.
• Adding the seasonal switching overlay to the model leads to more consistent returns over time, potentially making the reigns easier to hold.

Disclosures:

Invesco Nasdaq Dorsey Wright Momentum ETF (PDP): https://www.invesco.com/us/en/financial-products/etfs/invesco-dorsey-wright-momentum-etf.html

First Trust Dorsey Wright Momentum & Low Volatility ETF (DVOL): https://www.ftportfolios.com/retail/etf/etfsummary.aspx?Ticker=DVOL

Performance prior to each funds’ inception date are back-tested and based upon the underlying index shown below:

Inception date of PDP is 3/1/2007, prior to that all testing is based on backtested strategy information available on the Dorsey Wright platform.

Inception date of DVOL is 9/5/2018, prior to that all testing is based on backtested strategy information available on the Dorsey Wright platform.

Returns for all models and benchmarks are Pure Price Returns, excluding dividends and transaction costs.  Returns within the model portfolios are a result of back-testing.  Back-tested performance is hypothetical and is provided for informational purposes to illustrate the effects of the strategy during a specific period. The hypothetical returns have been developed and tested by NDW, but have not been verified by any third party and are unaudited.  Back-testing performance differs from actual performance because it is achieved through retroactive application of a model investment methodology designed with the benefit of hindsight.

Model performance data (both back-tested and live) does not represent the impact of material economic and market factors might have on an investment advisor’s decision-making process if the advisor were actually managing client money.  Investors cannot invest directly in an index.  Indexes have no fees.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Relative Strength is a measure of price momentum based on historical price activity.  Relative Strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon