This is a third contribution from Andrey S. of Russia (also responsible for the trading nuggets here and here). Needless to say, Andrey is this short-on-time blogger’s best friend at the moment.
Here Andrey shows that some hi-yield bond funds exhibit strong weekly follow-through. By “follow-through” I mean up weeks tend to be followed by up weeks and down weeks by down weeks.
This strategy needs a little TLC because it can’t be traded in its original form. Andrey ran his test on Vanguard’s mutual fund VWEHX (because more historical data is available), but Vanguard penalizes active trading. So in the second half of this post, I’ll show results applied to something a bit more trader friendly, the ETF HYG.
(logarithmically-scaled)
The graph above shows the result of Andrey’s strategy trading Vanguard’s VWEHX (red) vs buy and hold (blue) since inception in 08/1989. These results are frictionless (do not account for transaction costs), but like most of my tests of longer-term strategies, I’ve assumed a return on cash of half the nearest 3-month Treasury.
Strategy Rules: Go long at the close of the last trading day of the week if HY bonds close equal to or higher than the previous week. Close the position and move to cash if they close lower. This strategy is long-only.
And for the number-lovers:
Naturally, because VWEHX was on one long positive run over most of the test, a trend-following strategy is probably going to do pretty well, but note that it was able to outpace buy and hold with about a fourth less exposure to the market, perform significantly better on a risk-adjusted basis, and weather all major downturns well.
A Little TLC
As previously mentioned, VWEHX is not appropriate for active trading; however, the ETF HYG is.
