BOTW 7: Momentum of momentum

A pairs strategy using momentum as a signal on momentum and covered call ETFs produces attractive outperformance vs. the benchmark

We have a quick backtest of the week, as we assume attentions are thin given the market bloodbath. Some may not even want to think about markets; even wished they would stay closed until the tariff turmoil is over. We've certainly felt that before, as we've watched our portfolio value evaporate faster than it takes the kettle to boil. But if it's possible to let go of your ankles for a second—we admit it was hard to do to write this post—lend us your attention for a few minutes for an interesting twist on pairs trading momentum vs. yield.

We've looked at momentum and covered call ETFs as well as the phenomenon of momentum in general. Interestingly, even though momentum is a well-known anomaly and investable, we thought it would be interesting to construct a strategy to exploit the momentum of momentum relative to some other investable product like equal-weighted indices or covered calls. The logic here is simple. If the momentum of momentum is greater than the other strategy on some lookback period, go long momentum and short the other strategy. If not, then short momentum and long the other strategy.