Absolute vs. Relative Momentum: When to Use Each
Momentum is the engine of \1. But "momentum" is not one concept — it is two distinct phenomena that answer different questions, protect against different risks, and work through different market mechanisms. Conflating them leads to portfolio blind spots. Understanding their differences — and how they complement each other — is essential for building strategies that perform across all environments.
Two Questions, Two Signals
Absolute momentum (also called time-series momentum) asks: Is this asset going up? It evaluates each asset independently against a threshold — typically zero or the risk-free rate. If the 12-month return of SPY exceeds Treasury bill returns, absolute momentum is positive: the trend is intact, hold the asset. If not, the trend has broken: step aside.
Relative momentum (also called cross-sectional momentum) asks: Is this asset going up more than alternatives? It compares assets within a defined universe and ranks them from strongest to weakest. The portfolio concentrates in the leaders regardless of whether the leaders' absolute returns are positive or negative.
The distinction matters because each question has a critical blind spot that the other resolves.
Absolute Momentum: The Safety Filter
Absolute momentum's primary value is bear market protection. When an asset's return turns negative — dropping below its moving average or producing a negative trailing return — absolute momentum moves the portfolio to safety. This is the mechanism behind the finding that a simple 10-month SMA reduced the S&P 500's \1 from −55% to approximately −15%.
The signal is unambiguous. Either the trend is positive (hold) or it is not (don't hold). There is no ranking, no comparison, no subjective interpretation. This binary clarity makes absolute momentum easy to implement and psychologically straightforward to follow.
Absolute momentum has been shown to work across virtually every liquid asset class — equities, bonds, commodities, currencies, real estate. Moskowitz, Ooi, and Pedersen (2012) documented positive time-series momentum returns across 58 liquid instruments spanning multiple decades. It is one of the most robust phenomena in financial economics.
The Blind Spot
Absolute momentum answers "is this asset worth holding?" but not "which asset should I hold?" If five assets all have positive momentum, absolute momentum says "hold all five" without preference. It cannot distinguish between an asset with +3% trailing momentum and one with +30% — both pass the filter identically. Applied alone, absolute momentum provides safety but no asset selection intelligence.
Relative Momentum: The Ranking Signal
Relative momentum directs capital to wherever returns are strongest. By ranking assets and concentrating in the top performers, it captures the full upside of the dominant trend. During the 2017 emerging market rally, relative momentum concentrated in EEM — the year's best-performing major asset class. During the 2021 commodity surge, it would have directed capital to commodities ahead of the crowd.
Relative momentum also adapts to shifting market leadership automatically. When U.S. equities lead, the portfolio holds U.S. equities. When international markets take over, it follows. When bonds outperform during a flight to quality, it captures the rotation. No forecast required — the ranking reflects whatever the market is actually doing.
The Blind Spot
Relative momentum will invest in a declining asset as long as it is declining less than alternatives. During a broad selloff where stocks are down 30% and bonds are down 10%, relative momentum selects bonds — even though bonds are losing money. It always finds a "winner," even when all options are losing. Without an absolute filter, relative momentum keeps the portfolio exposed to deteriorating conditions simply because one option is "less bad."
This is not a theoretical concern. During the 2008 financial crisis, a pure relative momentum strategy would have rotated from equities (declining fastest) to bonds (declining less) — and held bonds through their own decline. The portfolio would have participated in losses across multiple asset classes, just sequentially rather than simultaneously.
Why Both Together
The blind spots are perfectly complementary:
| Market Condition | Absolute Momentum Alone | Relative Momentum Alone | Both Combined |
|---|---|---|---|
| Strong bull market — all assets rising | Holds all assets equally | Concentrates in the strongest | Concentrates in strongest ✓ |
| Broad bear market — all assets falling | Exits to safety | Stays invested in "least bad" | Exits to safety ✓ |
| Divergent market — some up, some down | Holds positive assets equally | Concentrates in strongest | Concentrates in strongest positive ✓ |
| Late cycle — weak positives | Holds weakly positive assets | Concentrates in strongest | Concentrates in strongest positive ✓ |
The combined approach uses relative momentum for asset selection ("which asset?") and absolute momentum as a safety gate ("is it worth holding at all?"). This two-step process — rank, then filter — eliminates both blind spots simultaneously.
Dual Momentum in Practice
Gary Antonacci formalized this combination as "\1" in his 2014 book. The implementation is a two-step monthly process:
Step 1 — Relative ranking: Calculate lookback returns for each asset in the offensive universe. Rank from highest to lowest. Select the top N.
Step 2 — Absolute filter: For each selected asset, check whether its return exceeds the risk-free rate. If yes, hold it. If no, replace it with a defensive asset.
In strong markets, relative momentum drives selection — the portfolio holds the strongest assets. In weak markets, absolute momentum drives defense — the portfolio holds safety. In mixed markets, both contribute — the portfolio holds only the genuinely strong assets and replaces the weak ones with defensive positions.
How Published Strategies Use Each Type
Different tactical strategies weight the two types differently, creating distinct profiles:
GEM: Classic dual momentum. Relative comparison between U.S. and international equities determines the holding. Absolute filter against T-bills determines whether to hold equities at all. Equal emphasis on both types.
GTAA: Primarily absolute momentum. Each asset is independently filtered against its own moving average. No relative comparison between assets — all assets above their SMA are held. The missing relative component means GTAA holds both strong and weak positive assets equally.
ADM: Enhanced dual momentum. Composite momentum score provides faster relative ranking. Absolute filter with dynamic defensive selection. Emphasis tilted toward relative (concentrating in the single strongest asset).
DAA/BAA: Absolute momentum on canary assets (the defensive trigger), relative momentum on both offensive and defensive universes (asset selection within each mode). The separation of detection (absolute) from selection (relative) across different asset sets is the \1's defining innovation.
Lookback Period Interactions
Both momentum types are sensitive to the lookback period, but they respond differently:
Short lookbacks (1-3 months): Faster response to trend changes but more noise. Relative rankings shift frequently, increasing turnover. Absolute filters trigger more often, creating more defensive entries and exits.
Medium lookbacks (6-12 months): The empirical sweet spot. Long enough to capture meaningful trends, short enough to respond before the trend fully reverses. Strong academic support across multiple asset classes.
Composite lookbacks: Many modern strategies average multiple periods (Keller's 13612W formula weights 1, 3, 6, and 12-month returns). This captures information from all time horizons simultaneously — the responsiveness of short lookbacks with the stability of long ones.
The Priority Question
If you could only use one type of momentum, which should it be?
Absolute momentum. Without hesitation.
The drawdown protection that absolute momentum provides is the most valuable feature of tactical asset allocation. A portfolio with absolute momentum but no relative ranking will hold safe, unranked positions during bull markets and exit to safety during bear markets. Suboptimal during good times, but survivable.
A portfolio with relative ranking but no absolute filter will concentrate in the strongest assets during bull markets (excellent) but stay invested in declining assets during bear markets (potentially catastrophic). Optimal during good times, but vulnerable to the deep drawdowns that permanently impair wealth.
Drawdown protection trumps asset selection. The portfolio that survives the bear market always outperforms the portfolio that was optimally positioned during the bull market but then suffered a −50% decline.
That said, using both is strictly better than using either alone. The combination requires no additional data, minimal additional computation, and produces measurably better risk-adjusted returns across all historical periods. There is no good reason to use one without the other.
On PortfolioWiser, strategies spanning the full spectrum — from pure absolute-momentum trend filters to dual-momentum ranking systems to canary frameworks that separate detection from selection — are available with automated signal calculation. The platform's comparison tools show exactly how each momentum type contributes to performance across different market environments.