How it works – A note on the CMG NDR Large Cap Momentum Index: The index is a weight of evidence approach to identify high risk and low risk investment environments.
The direction of the model line in the middle section of the chart can help us see if the weight of evidence is improving or worsening.
There are four trend indictors and three counter-trend or mean-reversion indicators that are applied to each of 22 different sectors. These are indicators that have done a good job in the past at identifying periods of high and low market risk. Of course, there are no guarantees.
Four Momentum indicators:
- Momentum – Rate of change (1 to 5 years).
- Moving Average “MA” cross over (both shorter term and longer term periods are measured.
- Triple MA cross – similar to a cross that compares two moving averages – here a third moving average is added (short-term, median-term and long-term periods are evaluated. That is, for median-term, we look at 21 days, 42 days, and 63 days).
- MA slope – evaluates the percentage change of the MA. If it falls a certain percentage from a high, it signals scores negatively in the model. If it rises by a certain percentage from a low, it scores favorably in the model.
- RSI – Relative Strength Indicator
- Deviation from Trend – a ratio of MAs against each other, i.e., if a short-term MA moves far above a sector’s long-term MA, then the move is stretched and the model scores such a move with a lower score. The reverse is true on rallies.
Overall, the model is looking at the collective strength or weakness across 22 industry sectors, each scored separately then added together to create the overall model score. The mean reversion indicators help to not chase into rallies but rather “buy the dips” once a favorable trend environment across many sectors is identified based on cumulative score.
Past performance cannot predict or guarantee future performance.