Introduction

During Bull markets, the EZ-MO Broad Markets Momentum Index selects a portfolio of three ETFs comprising the Momentum Leaders of each of its three underlying strategies: SPY-Defender, QQQ Defender, and Global Defender.  During faltering Bull markets, the Index further considers the momentum of a Defensive Backstop strategy intended to provide a performance floor for the Momentum Leader selection process. During Bear markets, as determined by StormGuard-Armor, the Index employs a Bear Market Strategy that seeks to avoid risk and secure a positive return by selecting Momentum Leaders from among a selection of bond, treasury, gold, and other defensive ETFs. 

The objective during a Bull Market is to own a set of momentum leaders, so the operative question is “which of the many methods of measuring momentum is optimum?”  Our video entitled “Which Trend is My Friend?” answers that question in general and in detail, and the answer is not even close to the financial industry’s 12-month simple moving average momentum factor.

Of course, the optimum method, stated simply is "the one that best predicts next month’s top performers." When further considering different market temperaments and asset classes, the solution requires some serious signal processing expertise – our forte.  Our algorithmic technology, Temporal Portfolio Theory, employs the cross-disciplinary sciences of Matched Filter Theory and Differential Signal Processing – the very same technologies that enable WiFi, USB, iPhones, digital TV, to perform so well. AI Fuzzy Logic and AI Feedback Loops further improve the model's defensive and adaptive performance.

Risk Avoidance? 

According to MPT, risk is a simple one-dimensional problem cured by a single dose of diversification. However, our research shows that the most proficient way to reduce risk is through “risk avoidance” – specifically, avoidance of momentum laggards and avoidance of bear markets. We employ a fairly sophisticated Bull-Bear indicator, StormGuard, which is designed to determine whether to identify momentum leaders from (1) a set of bullish equities or (2) a set of defensive bonds, treasuries, or commodities. In 1952, Modern Portfolio Theory (MPT) led to a portfolio design strategy of diluting equity risk with a strong bond position, which is the basis for today's popular 60/40 portfolio. Unfortunately, the reduced risk comes with a cost of a substantially reduced return. A better solution is employ modern signal processing methods to know when to hold bullish equities and know when to "avoid bear market risk" and own a set of defensive momentum leaders.