Rsi for Investment Strategy

Mebane T. Faber Portfolio Manager CAMBRIA INVESTMENT MANAGEMENT, INC.

APRIL 2010

Relative Strength Strategies for Investing

First Draft April 2010

ABSTRACT

The purpose of this paper is to present simple quantitative methods that improve risk-adjusted returns for investing in US equity sector and global asset class portfolios. A relative strength model is tested on the French-Fama US equity sector data back to the 1920s that results in increased absolute returns with equity-like risk. The relative strength portfolios outperform the buy and hold benchmark in approximately 70% of all years and returns are persistent across time. The addition of a trendfollowing parameter to dynamically hedge the portfolio decreases both volatility and drawdown. The relative strength model is then tested across a portfolio of global asset classes with supporting results.

mf@cambriainvestments.com http://www.cambriainvestments.com/ www.mebanefaber.com

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Electronic copy available at: http://ssrn.com/abstract=1585517

MOMENTUM

Momentum based strategies, in which we group both trendfollowing and relative strength techniques, have been applied as investment strategies for over a century. Momentum has been one of the most widely discussed and researched investment strategies (some academics would prefer the term “anomaly”).

This paper is not an attempt to summarize the momentum literature. There are numerous sources that have done a fine job on that front already including:

On the Nature and Origins of Trendfollowing – Stig Ostgaard The Case for Momentum Investing – AQR Website Bringing Real World Testing to Relative Strength – John Lewis Global Investment Returns Yearbook – Dimson, Marsh, Staunton Appendix in Smarter Investing in Any Economy – Michael Carr Trendfollowing – Michael Covel The Capitalism Distribution – BlackStar Funds Annotated Bibliography of Selected Momentum Research Papers –...