Does Momentum Really Work on Indices?

Positive Momentum is one of the most common factors considered useful for buying in. Since I designed the Sector momentum screener, I have been obsessed with finding more efficient ways to trade/invest within the Index universe.
Recently, after my twitter post showcasing the Ranking system of Indices based on Momentum, one of my followers suggested backtesting a systematic strat based on the ranks.

The strat is as follows:
1. Rank the Indices based on the Equi-weighted Momentum score – methodology HERE
2. Buy into the top 3 Indices in an Equi-weighted manner (Rs. 100,000 each) [Buy based on next day price, coz the signal is generated after close of that day]
PS. Since using the Close or Open price is fallacious (execution will never be that perfect), I randomly generated the price based on uniformly distributed prices between High and Low.
3. Track them daily, and sell if they fall out of the top 3 [Sell also based on next day’s price]
4. Calculate the cumulative PnL, while excluding the last trade if not completed (Index bought, but not sold yet)

Data used: Indices bhavcopy supplied by NSE (EOD)
Time period: Mid 2012 to Mid 2023

Intermediate Data Files:
1. Rank and Momentum Scores of all Indices for all Dates – HERE
2. Complete Trade Data with PnL for each Index – HERE
3. Summarized Trade Data for each Index – HERE

The results are Okayish, and merit further analysis relative to Nifty.
Just look at the panels of cumulative PnL below for each Index.

The statistics of the trades for each index are as follows:

Computed the naive returns for the strategy portfolio against Nifty Buy and Hold (3L capital) since the day first signal was generated. And the returns are not even close. Nifty B&H wins again, and yet another strategy shelved.

In conclusion this strat is a thumbs down. Thankful to my followers for reaching out and giving the idea.
Even negative backtests are useful. They help in pointing us in the opposite direction.

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