Momentum investing works because it rides trends. But trends end — sometimes violently. The biggest challenge isn't identifying what's going up; it's knowing when to stop chasing something that's already turning over.
Our EMA filter is the answer. It's a binary gate: if a sector isn't in a confirmed uptrend, we won't touch it — regardless of how strong its momentum ranking is.
What Is an Exponential Moving Average?
A moving average smooths out short-term price noise to reveal the underlying trend. An exponential moving average (EMA) weights recent prices more heavily than older ones — it reacts faster to current conditions than a simple moving average.
Our EMA filter uses multiple moving averages — one shorter-term, one longer-term. Both must be aligned in an upward sequence before capital is deployed. This stacked confirmation means the sector must be trending positively on multiple timeframes simultaneously.
The 2018–19 Crypto Bear Market
Bitcoin peaked near $19,000 in December 2017 and lost over 80% of its value by December 2018. Any strategy holding BTC through that period would have been devastated.
The Momentum Capital strategy wasn't. When BTC's price broke below the EMA threshold in early 2018, the filter triggered. Capital rotated to qualifying non-crypto sectors. Ethereum and BTC remained blocked by the filter through the entire 2018–19 bear market — over 18 months of crypto winter, the strategy held none of it.
The 2022 Bear Market
2022 was brutal across the board: SPY fell 16.6%, BTC fell over 65%, and the broader crypto market collapsed. The Nasdaq entered a true bear market. Yet the Momentum Capital strategy returned +11.6% for the year.
How? The same filter. When crypto and growth equities broke their EMA thresholds in early 2022, the system rotated away from them entirely. Energy (XLE) was among the few sectors holding its trend — it returned over 60% in 2022 as oil prices surged. Our system held it because it passed the EMA test. Crypto and tech didn't, so we didn't.
−4.6%
2008 strategy return
SPY was −40.4%
+11.6%
2022 strategy return
SPY was −16.6%
Why EMA and Not Something Else?
We tried many trend filters during backtesting: RSI thresholds, Bollinger Bands, rate-of-change, even more complex multi-factor filters. The EMA dual filter outperformed on the key metric that matters: reducing max drawdown while preserving upside capture.
Simple rules tend to be more robust out-of-sample than complex ones. A filter with 5 parameters can be overfit to historical noise. A filter with one clear, interpretable rule — price must be above two moving averages — is likely to hold up in future regimes.
The Cost: Missed Rallies
No filter is free. When crypto roared back in 2023, the EMA filter was slow to confirm — momentum scores were strong, but price hadn't yet re-established cleanly above the EMA threshold. The strategy missed a portion of the early recovery.
Similarly, when a sector briefly dips below the EMA and then recovers, the filter may cause a late entry. You won't catch the exact bottom. That's intentional — catching the bottom also means catching every false recovery in a genuine bear market.
The tradeoff is deliberate: we sacrifice some upside in return for dramatically reduced downside. Over 19 years, that trade has been worth it — the strategy's Sharpe ratio of 1.160 reflects strong risk-adjusted returns, not just raw CAGR.
Watching the Filter in Real Time
The momentum rankings page shows the current EMA status for all 18 sectors. You can see in real time which sectors pass the trend filter and which are blocked — giving you full transparency into why the system is (or isn't) allocating to any given theme this week.