Trend Quality Index (TQI)

The Trend Quality Index measures trendiness, based on sequential structure of price returns.  When stocks or sectors are trendy they present greater opportunity than when they are not.

The TQI scale ranges from –1 to +1, with positive values indicating trendy behavior and negative values indicating untrendy behavior.  Historically, stocks have an overall bias toward positive values, as most stocks and almost all broad indexes normally generate positive TQI most of the time. (S&P Example.) 

TQI enhances momentum strategies. Positive TQI values are favorable for price momentum.  Negative values are generally unfavorable for momentum.  Thus, TQI is not a directional indicator in itself.  Instead, it’s like a “hamburger helper” that makes momentum strategies a little better.

Momentum Enhancement Test

To show how TQI Enhances Momentum, we applied four "cookie-cutter" momentum strategies to each of six style sectors. Each of the 24 Strategy/Style pairs was run first with and then without TQI input. The bottom line: successful stategies were more successful with TQI screen.

Here are the details.  Each style index generates a Momentum path, which is a double exponential smoothed series of daily returns. The four “strategies” are based on the condition of each style’s Momentum path.  The four Momentum conditions are; positive and rising, positive and falling, negative and rising, or negative and falling.  Each "strategy" simply consists of holding a given style when its Momentum condition is met, and exit when it's not.

Six Style Sectors

Large.Growth Large/Value
Mid/Growth Mid/Value
Small Growth Small/Value

Four Mom Conditions:

Positive/Rising Positive/Falling
Negative/Rising Negative/Falling

There are (6x4 =) 24 combinations of these Styles and Mom conditions.  Each combination is deemed "successful" if it generates annualized returns greater than its raw style index.  It is "unsuccesssful" if it generates returns at a rate less than its raw style index.  The annualized strategy returns ranged from very successful (+65%) to very unsuccessful (–33%).

On average, the strategies added only +4% over their raw style indexes.  So some strategies were good and some were bad, and overall there was not much difference between a momentum strategy and its raw style index.  But adding the TQI overlay bumps that +4% differential up to +18%.

The TQI effect isn’t all upside, however; while successful strategies became even better using TQI, unsuccessful strategies were made worse.  It’s the winning strategies that benefit, and it is winning strategists who can benefit using the Trend Quality Index.

         TQI & Growth Style Momentums...

               TQI & Value Style Momentums...

TQI & General Market Condition

Trend Quality also affects generalized market strength.  While never giving anything like "signals," markets have been significantly stronger in periods of higher TQI. Low or negative TQI is clearly associated with historically weaker performance. This relation also holds for individual stocks and sectors, but most consistently apparent for broader indexes as with the S&P example linked above. 

The following table summarizes a decade of TQI effects for four major market indexes.  Percents are shown at annualized rates.

                    TQI Performance Effects (1993-2002 inclusive): 
Above-Average TQI  Yields Above-Average Returns

TQI State DJIA S&P 500 Nasdaq Russell
Average TQI -.05 +.23 +.56 +.76
Days TQI > Avg 1219 1292 1510 1616
Returns, TQI > Avg +17.3% +19.3% +15.8% +12.4%
Returns, TQI < Avg +8.3% +1.9% +6.2% +5.1

The portion of time with above-average TQI varied from 49% (DJIA) to 65% (Russell 2000).  For each index, periods of above-average TQI were more than twice as productive as periods of below-average TQI.  

TQI is not a magic bullet.  It has timing implications, but is not really a timing indicator.  It does not generate buy or sell "signals."  It does make winning strategies winning-er, and it does identify statistical behavior that favors above-average returns.  And by focusing on sequential structure instead of magnitudes, TQI adds a new dimension of trend analysis.

TQI is offered by custom subscription.  To get examples on your own stocks, and to see how to define the custom service best for you, click here.

To enquire about access and analysis with TQI on market indexes and on your own stocks and funds, you can leave a message back at the Metrics page, or use the master checklist of Analytix Services.  Or call directly anytime, at (603) 643-6430.

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