Breaking Bad Trends

Abstract

We document and quantify the negative impact of trend breaks (i.e., turning points in the trajectory of asset prices) on the performance of standard trend-following strategies across several assets and asset classes. The frequency of trend breaks has increased in recent years, which can help explain the lower performance of monthly trend following in the last decade. We illustrate how to repair trend-following strategies by exploiting the return forecasting properties of the different types of trend breaks: market corrections and rebounds. We construct dynamic multi-asset trend-following portfolios, which harvest more than double the average returns of standard trend-following investing strategies over the last decade.


Also see our related paper: Momentum Turning Points

Keywords: Time-Series Momentum, Volatility Timing, Market Timing, Asset Pricing, Trend Following, Turning Points, Momentum Speed, Mean Reversion, Behavioral Finance

JEL Classification: G12, G13