FTSE Momentum Basket Strategy

Momentum is the tendency for winning stocks to continue winning and losing stocks to continue losing. Over 3-12 months, stocks that performed well tend to keep performing well. This creates opportunity to buy winners systematically.

Short-term reversal effect. The most recent month often reverses direction. Academic research shows skipping it (using '6-1' momentum) improves results. Calculate from month -2 to month -7.

15 stocks is standard for FTSE 100. Too few (5) is concentrated risk. Too many (30+) approaches the index. 15 balances diversification with concentration in winners.

200 SMA filter: When FTSE 100 > 200 SMA = bull market (full momentum). When below = bear market (reduce exposure or cash). Protects against momentum crashes in reversals.

UK stamp duty 0.5% on purchases + commissions + spreads = ~0.8-0.9% round-trip. With 30-50% monthly turnover, annual costs are 3-5%. Net momentum premium ~2-4% after costs.

Momentum / Volatility. Rewards high returns, penalizes volatility. Stock with +20% momentum and 30% vol scores better than +20% with 50% vol. Often improves risk-adjusted performance.

Set maximum per sector (30-35%). If exceeded, skip lowest-ranked stock in that sector. Or use sector-neutral approach (top from each sector). Prevents unintended sector bets.

Standard deviation of momentum scores across stocks. High dispersion = clear winners/losers (good for momentum). Low dispersion = little differentiation (momentum less effective). Monitor as timing signal.

Use rebalancing bands. Don't sell if stock drops from Top 15 to Top 20. Only sell if drops to rank 25+. Reduces unnecessary trades while capturing momentum. Can cut turnover 30-40%.

Prior losers often rebound in January (tax-loss selling reversal). This hurts momentum (long winners). Consider reducing momentum exposure in late December. Effect has weakened but still exists.

Momentum = (Close[-21]/Close[-126])-1 for all stocks. Rank descending. Select Top 15. Weight = 1/15 each. Monthly rebalance. Use bands (sell at rank 25+). Filter: if FTSE < 200 SMA, reduce exposure.

Regress returns on factors: Return = α + β×MKT + β×SMB + β×HML + β×UMD. Understand exposures. Can combine momentum with Quality (high ROE) or Low Vol for multi-factor portfolio.

Predict persistence: which momentum stocks will continue. Features: momentum metrics, volatility, fundamentals, technicals. Models: RF, XGBoost. Walk-forward test. Ensemble with traditional for robustness.

Sell 30-delta OTM calls on momentum holdings. 30-45 DTE. Generates 2-4% income annually. Caps upside but improves risk-adjusted returns. Roll or let expire. Good for volatile momentum stocks.

Start UK (familiar). Add US (largest, most liquid). Then Europe/Japan. Options: regional baskets combined, or global ranking. Consider currency hedge. More opportunity, more complexity.