Momentum Basket Strategy

For a 20-stock equal-weight basket you need enough to buy meaningful positions in each. At about A$2,500 per stock you would need roughly A$50,000 minimum. Using CFDs for leverage, less capital could work. For smaller capital, a momentum ETF like the BetaShares Australian Momentum ETF (MTUM) is a simpler one-trade alternative.

Research shows a short-term reversal effect - stocks that jumped in the last month often pull back slightly. By skipping the most recent month, we capture the medium-term trend (months 2-12) while avoiding the short-term reversal. This improves signal quality.

Momentum crashes occur when previous winners suddenly become losers (and vice versa). This typically happens during market regime changes, crises or sector rotations. The basket can drop 20-30% quickly. Risk management (stops, volatility scaling) helps limit the damage during crashes.

Yes. The S&P/ASX 200 Momentum index and the BetaShares Australian Momentum ETF (MTUM) provide exposure to the momentum factor with lower effort. However, a custom basket allows more control over sector caps, position sizing and rebalancing rules. Index/ETF-based is simpler; a custom basket allows optimization.

Monthly rebalancing is standard - it captures momentum rotation without excessive turnover. More frequent (weekly) increases costs too much; less frequent (quarterly) may miss momentum shifts. Monthly balances signal capture with cost efficiency.

Screen for momentum first (top 50 by 12-1 return), then filter for quality (ROE > 15%), value (PE < 40x), or low volatility. The remaining stocks have momentum plus other favorable characteristics. This multi-factor approach improves risk-adjusted returns and reduces crash risk.

Price momentum uses stock returns (12-month price change). Earnings momentum uses fundamental data (EPS revisions, earnings surprises). Both predict future returns but capture different information. Combining them provides more robust signals than either alone.

Use buffer zones (exit at rank 30, not 20), threshold rebalancing (only trade if drift is >3%), and consider bi-monthly instead of monthly rebalancing. These can reduce turnover by 30-50%, saving meaningfully in annual transaction costs. It helps that Australia has no securities transaction tax or stamp duty on share trades.

Equal weight is simpler and more diversified - each stock contributes equally to performance. Momentum weight allocates more to the highest momentum stocks, potentially higher returns but more concentrated. Start with equal weight; graduate to momentum weight if comfortable with concentration risk.

The primary benchmark is the universe index (the S&P/ASX 200). Secondary is the S&P/ASX 200 Momentum index, or the MTUM ETF for a direct, investable momentum comparison. Calculate alpha (excess return), tracking error and the information ratio. You should beat the universe index; compare to the momentum index for implementation quality.

Combine signals: 12-1 return (30%), 6-1 return (20%), 52W high (15%), earnings revision (15%), revenue acceleration (10%), technical indicators (10%). Convert each to z-scores, apply weights, sum for a composite. Walk-forward test to validate the weights out-of-sample.

Gradient boosting (XGBoost, LightGBM) handles mixed features well. Use time-series cross-validation (not a random split). Features: returns, volatility, fundamentals, technicals, sector. Target: top quartile next month or predicted return. Ensemble with traditional methods for robustness.

Monitor warning indicators: narrowing momentum dispersion, an extreme value spread, weakening breadth, a rising A-VIX. Implement regime-based allocation (reduce exposure when warnings elevate). Buy OTM puts on the XJO for a tail hedge (1-2% cost), or use A-VIX futures. Have clear exit rules for crash scenarios.

Core-Satellite: 50-60% in a diversified index (core), 20-30% in momentum (satellite), the rest in other factors and cash. The Kelly criterion suggests a 20-25% optimal allocation. Rebalance between core and satellite to maintain the allocation. Monitor correlation - if it is too high, reduce the momentum allocation.

Index futures (SPI 200 / ASX 200): a partial basket via index futures frees capital for a risk-free return (the cash rate, around 4.35%). CFDs: single-name leverage and shorting, since the ASX has no single-stock futures. Covered calls: on mature momentum stocks for income. Protective puts: 8-10% OTM on the XJO index for crash protection (1-2% annual cost). Synthetic: options combinations reduce the capital requirement. Balance leverage with crash risk.