How does the prior years return impact future performance (Part 2)

In this post I decided to continue the prior study.  In the prior post I present a study that looks at how future performance is impacted by the prior year for some of the most liquid ETFs.  I now extend these results by reviewing  the best and worst performers of 2010 and eliminated those that were less than 500million USD in size and have very low volume.  The results below indicate that when you have extreme movements either up or down there is a period of reversal.  Note that the exception is UNG which seems to have gone down since inception however both EWP and EWI have gone up 13% since 12/31/2010 and all the best performers in ETF have had a reversal.  Note that while TUR did not have an extreme movement upwards in 2010 (anything over 50% is extreme) it was still among the top performers.  It will be interesting to monitor these positions throught the first half of 2011 to see where they end up.   Note as a disclaimer these are merely observations that I am making about the ETF market and not live positions.

How does the prior years return impact future performance

In the following study I decided to analyze the walk forward performance of some highly liquid ETFs.  For this study the ETFs are divided into four buckets of performance over the prior year.   The buckets are as follows,  bucket1 (-50% to -25%),  bucket2 (-25% to 0%), bucket3 (0% to 25%),  bucket4 (25% to 50%).  The walk forward periods are 90, 120 and 252 days.   What is interesting is that the best walk-forward performance occurs when the prior year performance is in bucket1 (-50% to -25%). 

The 252 days walk-forward period performance is on average between 45% and 70% if the prior year was in bucket1.   Similarly in all cases if the average over the prior year was in bucket 4 (25% to 50%) in the next 90, 120, 252 walk forward periods the performance is negative.    The trading strategy would be load up  when the prior year is in bucket 1and short when the prior year is in bucket 4 .  Note also the the 252 day walk forward period is significantly better than both the 90 and 120 day periods.

Results For the Brazil EWZ Model

The last long EWZ trade was entered on  08/27/2010 and exited  10/05/2010 right now the system is neutral.  The system had a return of 16% for 2010 vs a gain of 7.07% for the underlyer.  So far the underlyer EWZ has had a net loss since year end 2010 while the system has remained neutral.