The Thesis
Dual-momentum is one of the cleaner rules in quantitative equity investing: rank every name in the universe by its 60-day trailing return, hold the leaders, and exit the moment trend breaks. No macro forecasts, no earnings models — just price momentum as a proxy for sustained institutional demand. The strategy covers 24 large-cap U.S. names across tech, financials, healthcare, consumer, energy, and industrials, giving it meaningful sector breadth without venturing into illiquid territory.
Backtest Numbers at a Glance
Over 451 days ending mid-2026, the strategy grew a $10,000 paper account to $12,349.63 — a 23.5% total return and a 12.52% CAGR. The Sharpe ratio sits at 0.95, which is respectable for a rules-based equity strategy without leverage. Maximum drawdown reached 15.67%, a figure that's manageable but worth watching given the strategy's reliance on trend continuation.
One number that stands out is the 28.79% win rate across 136 trades. That's not a typo — momentum strategies are explicitly designed to cut losers fast and let winners run, so a sub-30% hit rate paired with a positive total return reflects the asymmetric payoff profile working as intended. Turnover of 2,638% annualised is high, implying frequent position cycling; fee drag at $1/trade is minimal in this simulation but would matter more at real commission rates.
Walk-Forward Validation: The Full Picture
The four-fold walk-forward tells a more nuanced story than the headline return suggests.
| 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% |
Three of four folds are positive, and the most recent out-of-sample fold (Fold 4) produced a strong 13.34% return with a 2.15 Sharpe — that's genuinely encouraging. But Fold 2 is a red flag: a 7.31% drawdown with a −1.05 Sharpe during the January–July 2025 window shows the strategy can grind badly when trend is absent or reversing.
The probabilistic Sharpe ratio (PSR: 0.893) and deflated Sharpe ratio (DSR: 0.476) are the key reason validation did not pass. PSR above 0.95 is typically required to claim statistical robustness; the DSR penalty from running six parameter trials drags the adjusted confidence well below that bar. In plain terms: the backtest is promising but not yet sufficient evidence to rule out overfitting to the test window.
Current Activity
The strategy has been in a holding pattern through early July 2026 — six consecutive daily runs with zero executions and the full $10,000 in cash. This is consistent with a momentum filter that found no position in the universe meeting its entry criteria, likely reflecting choppy or range-bound conditions across the universe. Patience here is by design, not a bug.
Strengths and Risks
Strengths: The thesis is grounded in one of the most replicated anomalies in academic finance. Recent out-of-sample performance (Folds 3–4) is strong, and the strategy's willingness to hold cash is a genuine risk-control feature.
Risks: The failed DSR test means more observation is needed before treating the edge as reliable. A choppy, mean-reverting market — like the one implied by the current cash-flat run — is this strategy's natural enemy. High turnover also amplifies slippage and fee risk in live deployment.
Bottom Line
Dual-momentum earns a watch, not trade rating at this stage. The framework is sound, the recent folds are encouraging, and the disciplined cash-sitting behaviour in July is exactly right. But validation has not passed, and the Fold 2 loss sequence is a concrete reminder of what trend-following gives back in choppy regimes. More live out-of-sample data — particularly across a full volatility cycle — is the right next gate before scaling this strategy.