What the Strategy Does
Dual-momentum holds the strongest trending names from a 24-stock universe of large-cap U.S. equities — tech, financials, healthcare, consumer, energy, and industrials. Position entry is driven by the 60-day return rank; exit triggers on a trend break. It's a classic relative-strength approach, well-grounded in academic literature going back to Jegadeesh & Titman (1993) and popularized in applied form by Gary Antonacci.
The strategy went live on May 31, 2026 with a $10,000 deployment. No trades have executed yet — it opened to a flat cash position, meaning the first rebalance signal hasn't fired.
Backtest Performance
| Metric | Value |
|---|---|
| Total Return | 23.5% |
| CAGR | 12.52% |
| Sharpe Ratio | 0.95 |
| Max Drawdown | 15.67% |
| Win Rate | 28.79% |
| Trades | 136 over 451 days |
| Turnover | 2,638% |
A 23.5% total return over roughly 15 months is respectable. The 12.52% CAGR beats a reasonable long-run equity benchmark expectation. The Sharpe of 0.95 is acceptable — not exceptional, but consistent with a trend-following strategy that tolerates extended flat periods.
The win rate of 28.79% is worth pausing on. Momentum strategies are designed to let winners run and cut losers quickly, so a sub-30% win rate is structurally expected — the strategy makes money through asymmetric payoffs, not batting average. That said, it also means roughly 7 in 10 individual trades close at a loss, which demands strong position sizing discipline.
Turnover at 2,638% is high. At $1 per trade in fees (totaling $136), transaction costs were modest in the backtest — but real-world slippage on a 24-stock universe with frequent rebalancing could erode returns meaningfully at larger capital scales.
The Validation Problem
Despite the headline numbers, the strategy did not pass automated validation. The key flags:
- DSR (Deflated Sharpe Ratio): 0.476 — after adjusting for the number of trials (6) and non-normal return distribution, the probability that the observed Sharpe reflects genuine edge rather than data-mining drops below 50%. This is the most serious flag.
- PSR (Probabilistic Sharpe Ratio): 0.893 — better, but still below the 0.95 threshold typically required for production confidence.
- Fold 2 failure: The January–July 2025 window returned −7.31% with a Sharpe of −1.05 and a 17.15% drawdown. That's a significant regime-driven loss that the strategy had no apparent mechanism to avoid.
The cross-validation picture is uneven: 3 of 4 folds are positive, and the most recent fold (Dec 2025–May 2026) returned +13.34% with a Sharpe of 2.15 — genuinely strong. But Fold 2's performance suggests the 60-day lookback may lag badly during sharp reversals or sideways chop.
What to Watch
The strategy is live but has yet to place a trade. The first few rebalancing cycles will show whether real-world execution tracks the backtest assumptions. Watch for:
- First entry signals: which names in the universe are currently top-ranked by 60d return.
- Drawdown behavior: given the 15.67% historical max drawdown, a live stop or circuit-breaker at that level would be prudent.
- Regime sensitivity: if the market enters a high-volatility, mean-reverting phase similar to early 2025, this strategy's lag could produce outsized losses before exits trigger.
The DSR flag shouldn't be dismissed — with only 6 parameter trials, the concern isn't brute-force overfitting but rather that the single lookback window (60 days) may be coincidentally optimal for the backtest period. A robustness sweep across 30, 60, and 90-day windows would meaningfully strengthen the case for production deployment.