The Thesis
Dual-momentum is a rules-based trend-following strategy: rank a 24-name universe of large-cap US equities by 60-day return, hold the strongest names, and exit when the trend breaks. The universe spans technology (AAPL, MSFT, NVDA), financials (JPM, V, MA), healthcare (JNJ, UNH, ABBV), consumer staples (PG, KO, WMT), and select cyclicals (CAT, HON, XOM). No discretionary overrides — the signal either fires or it doesn't.
Backtest Performance
Over 451 days of backtested history, dual-momentum produced:
| Metric | Value |
|---|---|
| Total return | 23.5% |
| CAGR | 12.52% |
| Sharpe ratio | 0.95 |
| Max drawdown | 15.67% |
| Win rate | 28.79% |
| Trades executed | 136 |
| Turnover | 2,638% |
The 0.95 Sharpe is respectable for a long-only equity strategy, and a 12.52% CAGR is competitive against a plain index during a mixed macro period. The low win rate (under 30%) is characteristic of momentum: most positions are small losers quickly cut, while a handful of winners do the heavy lifting.
The 2,638% annual turnover figure deserves attention. Even with flat $1-per-trade fees assumed here, high churn compounds friction in live conditions. Slippage and spread costs on real executions could meaningfully compress net returns.
Walk-Forward Validation: A Mixed Picture
The strategy was tested across four sequential out-of-sample folds. Three of four were profitable — but validation still did not pass.
| Fold | Period | Return | Sharpe | Max DD |
|---|---|---|---|---|
| 1 | Aug 2024 – Jan 2025 | +5.85% | 1.23 | 3.92% |
| 2 | Jan 2025 – Jul 2025 | −7.31% | −1.05 | 17.15% |
| 3 | Jul 2025 – Dec 2025 | +25.59% | 3.32 | 4.04% |
| 4 | Dec 2025 – May 2026 | +13.34% | 2.15 | 7.43% |
Fold 2 is the red flag: a 17% drawdown and negative Sharpe during the H1 2025 period suggest the strategy struggled badly when momentum rotated or reversed sharply. Fold 3's extraordinary rebound (+25.59% in five months, Sharpe 3.32) salvaged the overall OOS return to 13.34%, but one strong fold masking a painful fold is not the same as consistent edge.
The Probabilistic Sharpe Ratio (PSR) of 0.893 and Deflated Sharpe Ratio (DSR) of 0.476 tell a similar story: after adjusting for multiple trials across six parameter sets, the probability that this Sharpe is real — not a backtest artifact — sits below 50%. That is why the validation gate correctly flagged this strategy as not yet proven.
Recent Activity: Idle but Watching
The strategy has run on schedule every trading day through early July 2026, but has executed zero trades across the six most recent sessions. Cash remains fully deployed at $10,000 — meaning no positions are open and no new entries have triggered. The model sees no names in the universe currently crossing its 60-day momentum threshold cleanly enough to buy.
This is actually appropriate behavior for a trend-following system: staying flat during ambiguous or choppy tape is a feature, not a bug.
Strengths and Risks
Strengths: Transparent, rules-based logic with no discretionary drift. Three of four OOS folds positive. Conservative current positioning reduces live drawdown risk.
Risks: Fold 2 demonstrated that momentum crashes can be severe and fast. High turnover amplifies transaction costs. The DSR below 0.5 means the validation system's skepticism about overfitting is warranted given the number of parameter trials run.
Bottom line: Dual-momentum is a credible thesis in a legitimate stage-gate process. It is not yet validated for live capital deployment, and the current idle posture suggests the market is not giving it clear signals. Worth watching into Q3 2026 to see whether Fold 4's strong performance extends or mean-reverts.