Application of Momentum Strategy to S&P 500: A Five-Year Retrospective Analysis

Abstract

Momentum strategy, a popular approach since the 1990s, has seen various successful iterations over the years. However, with the market environment evolving considerably in recent times, this study seeks to explore the efficacy of a specific momentum strategy on the S&P 500 in the past five years. The hypothesis centers on the correlation between returns and the moving average, serving as a momentum indicator. A simple linear model relating the two is trained using historical data, and the subsequent strategy is formed based on the model's parameters. Different lookback periods are considered, leading to an evaluation of diverse strategies. Despite the strategy's simplicity, findings suggest that it might struggle to thrive in real market conditions. There are some strategies that beat the benchmark under ideal conditions, but all of them loss when the transection fees are taken into account. The analysis uncovers situations where momentum strategies can indeed be effective. This underlines the potential for further research and the development of a more sophisticated, precise strategy that mirrors real market dynamics with greater accuracy.