How to Improve Commodity Momentum Using Intra-Market Correlation

Abstract

Momentum strategies have seen diminishing returns across various asset classes in recent years. This paper proposes an innovative approach to improve momentum performance in commodity markets using an intra-market correlation filter. We use the relationship between short-term and long-term correlations as a predictor for when to apply momentum or reversal trading depending on market conditions. Our findings demonstrate that when the short-term correlation exceeds the long-term correlation, a momentum strategy-going long on top-performing ETFs and short on underperformers-yields optimal results. Conversely, when the short-term correlation is lower, a reversal strategy is more effective. This combined approach significantly enhances returns, nearly doubling those of standalone momentum or reversal strategies, while maintaining manageable levels of risk.