Inspirations

The strategy explores a pattern at the end of the month, which we also use in other instruments. However, since this ETF includes stocks from outside the USA, the strategy can be an interesting addition to a broader portfolio of systems, providing exposure to global markets. Is it worth implementing? Evaluate it based on this analysis!

The strategy is available in two versions: Free and PRO. We encourage you to thoroughly familiarize yourself with the FREE version, as it serves as the basis for both strategies.

Key components

• Exploration of the monthly pattern.

• The basis of the strategy is the period of the last few days of the month.

EEM is not a growth demon, but there are periods when emerging markets achieve much better results than the US market. However, the essence of the strategy lies in the observation that practically all the upward movement in this instrument occurs during the last few days of the month, while statistically the rest of the month is losing.

This is illustrated by the comparison below:

Let's first take a closer look at the EEM instrument itself, which is a powerful portfolio of nearly 1300 stocks from various markets, mainly in Asia. In 2021, their distribution was as follows:

Source: SeekingAlpha/ETF.com

You can find the current details from the creator of this ETF.

https://www.ishares.com/us/products/239637/ishares-msci-emerging-markets-etf

The correlation between EEM and S&P500 (SPY) in recent years is as follows:

As you can see, EEM has been performing significantly worse than the S&P500 since 2009. However, this was not always the case. For example, from 2003 to 2009, EEM was on top.

According to the theory of capital migration cycles from more expensive to cheaper markets, the dominance of American indices alternates with cycles of very high growth in Emerging Markets. Since 1988, it has looked as follows:

Source: Compilation by Algohubb.com using summaries from IndependentTrader.pl

As we can see, the current cycle is lasting significantly longer than the previous ones, but it can be assumed that EEM has another positive cycle ahead. Therefore, it is worth considering an intelligent investment in this very broad market.

What particularly interests us in this instrument are the periods of low correlation with American indices.

Entry rules

Entry occurs at the end of the day - the 25th of each month, or the next business day if it falls on a holiday.

Exit rules

The exit occurs at the end of the first day of the new month, or the next working day if the first day is a day off.

Trading Strategy Analysis

Backtest 1, Fixed $ Money Management

We are testing the period of the last 21 years for the years 04.2003 - 05.2024 (this is the period when this ETF is available).

• Invested capital: $100'000

• Tested period in years: 21

• Tested Instrument: EEM

Equity Chart for this test:

Test results:

Examples of transactions in the years 2020-2024:

Year-over-year and month-over-month results:

Backtest 2, % Money Management

In this backtest, we invest in a strategy that constantly uses 100% of the current capital (starting with $100,000). This means that as the capital grows or decreases, the position value changes proportionally. The rest of the parameters remain unchanged.

The Equity Chart for this test looks as follows:

Basic statistics resulting from the test:

The maximum open drawdown is shown on the chart and was 21% during the bear market in 2008. Interestingly, shortly after, a 7-day trade on 27.10.2008 more than made up for the entire loss, giving a 35% return! Also a positive reactions during bear markets can be so strong.

Using a percentage-based money management strategy and reinvesting all profits in the next trade results in a threefold increase in income from this strategy over a 20-year period compared to fixed money management.

Additional information about the strategy

Net Profit and CAGR

The net profit above $658k in the tested strategy is lower than the Benchmark (Buy & Hold SPY marked on the chart in yellow), which is above $746k, translating to a very similar CAGR of 10.13% vs. 10.70%.

This means that the tested strategy achieves a lower net profit and slightly lower average annual return, which we can see especially in the last years when the EEM was in a bear market.

Drawdown and Return/Drawdown ratio

The Max Drawdown in the tested strategy was 15.80% vs 55.20% in the benchmark, resulting in a better Return/Drawdown ratio of 6.90 vs 4.1. This indicates that the tested strategy was less risky and more stable, leading to better risk management compared to the benchmark.

Exposure

The exposure in the tested strategy was only 20.9% vs 100% in the benchmark. This means that the tested strategy was significantly less exposed to market risk, yet still achieved relatively good results, highlighting its effectiveness under lower market exposure conditions.

Winning Percent

The Winning percent in the tested strategy was 62.0%. This means that the majority of trades were profitable, which is an acceptable result, with a higher average win than average loss (AvgWin/AvgLoss - 1.32 in the MM$ test).

SL & TP

The strategy does not use typical stop loss and take profit orders, although there are no obstacles to implementing them. According to our tests, for most ETF/stock strategies, these settings worsen results (see why). Instead, the strategy has one exit signal or additional safety exit after 8 bars (time-based stop loss). Diversification within the portfolio of various strategies serves as protection against the strong impact of a single stock price change on the entire portfolio.

Market Regime

The strategy has been tested in all basic market regimes and includes filters implemented based on this.

Trading Costs

Trading costs and slippage were taken into account in the backtests, which occurred in real account tests for the Alpaca broker (detailed study). With a diversified portfolio of stocks and strategies, transaction costs can determine your profit or loss, so take the time to thoroughly test and choose a broker.

Robustness

The number of historical transactions of 255 is significantly lower than Stockpicker-type strategies, which can provide even over 100'000 transactions in robustness tests. We adhere to the principle that the fewer parameters, the greater the resilience of the strategy. Therefore, we make efforts to ensure that our strategies have as few parameters as possible and to select only those parameters that have a significant impact on the effectiveness of the strategy while also aligning with its character.

Recommended Instruments

The recommended primary instrument for this strategy in Algocloud is EEM.

Pattern Day Trader

The strategy statistically did not close any trades on the same day, so it does not meet the Pattern Day Trader (PDT) criteria. This means it can be traded on accounts below $25k.

Correlation with Other Strategies

A comprehensive comparison regarding correlation can be found here. It should be noted that the strategy is lowly correlated with other strategies (except for the PRO version, which is its extension). There is also a 40-50% correlation with Real Estate Monthly Mover, so capital allocation between these strategies can be considered. Go to the correlation page.

Summary & Strengths and weaknesses of the strategy

Strengths of the strategy:

• Low capital commitment: The strategy achieved this result with almost 5x less capital commitment than the benchmark (Exposure 20.9% vs 100%), which means it can be successfully used in a portfolio alongside other strategies.

• Low Drawdown: The maximum drawdown in the strategy was 15.80% compared to 55.20% in the benchmark. This shows that the strategy was less risky.

• Ability to be used on smaller accounts: A plus of the strategy is the lack of day-trading transactions, which means there are no restrictions for accounts smaller than $25k related to PDT.
  

Weaknesses of the strategy:

• Relatively long period of stagnation and very moderate growth in the period 2014-2020. This period included two major bear markets and capital declines for EEM itself up to 40%. In this context, the strategy's declines, around 17%, do not look bad, especially since the strategy quickly returned to new highs. It is positive that the year 2023 brought significant profits compared to previous years.
  

Summary

The EEM Monthly Mover strategy efficiently explores the best of emerging markets. Holding positions for just ~5 business days a month consistently yielded better results than holding positions for the entire month.

During the analyzed period, the EEM ETF experienced several significant price declines, even up to -65% in 2008. However, this strategy effectively reduced these major declines while taking advantage of periods of gains.

Emerging markets have had a tough time in recent years, indicating that stocks from these countries are undervalued and pay high dividends.

When investors realize the value in these markets again, we can expect another wave of strong growth similar to historical trends.

The strategy can even be applied manually. If you value your time, we suggest entrusting this work to simple and effective algorithms, so you won't have to worry about keeping track of deadlines, especially since by using capital precisely for part of the year, you can use multiple systems simultaneously.

Attention! Be sure to check out the Emerging Monthly Mover PRO strategy! For a small on-off fee, you can further improve your results with this strategy.

Download is free - login required

What you get in the package for this strategy:

• SQX file ready to use on the Algocloud and StrategyQuant platforms

• Pseudocode that describes all the rules in an easy-to-understand way.
  

If you need the code for this strategy in formats such as TradeStation (EasyLanguage), Multicharts, MT4, or MT5 (MQL), please contact us on this topic.