Absolute Momentum: The Bear Market Filter That Compares Returns to Risk-Free Rates

Absolute momentum is a risk management mechanism that compares an asset's trailing return against a benchmark — typically the prevailing Treasury bill rate — to determine whether the asset deserves any allocation at all. Unlike relative momentum, which asks "which asset is strongest?", absolute momentum asks a fundamentally different question: "is this asset strong enough to justify holding?" An asset can be the relative winner among its peers and still fail the absolute test if its returns do not exceed the risk-free rate, indicating that the entire asset class is in a deteriorating environment where cash offers better prospects.

How It Works

The standard absolute momentum test compares an asset's trailing twelve-month return to the annualized yield on short-term Treasury bills (commonly the 1-year or 3-month rate). If the asset's return exceeds the T-bill rate, absolute momentum is positive and the asset qualifies for allocation. If the return falls below the T-bill rate, absolute momentum is negative and the portfolio shifts to a defensive alternative — typically bonds or cash.

The T-bill rate functions as a dynamic threshold rather than a fixed number. During periods of low interest rates (2010-2021), the threshold was near zero, meaning virtually any positive equity return triggered a positive signal. During periods of higher rates (2023-2025), the threshold rose to 4-5%, requiring equities to deliver meaningful returns above risk-free alternatives before the signal turns positive. This dynamic adjustment makes the signal more conservative during environments where cash actually offers competitive returns — precisely the conditions where equity risk is least rewarded.

The Research Foundation

Gary Antonacci's research demonstrated that absolute momentum captures a distinct effect from relative momentum. Relative momentum exploits cross-sectional persistence — the tendency for winners to keep winning relative to losers. Absolute momentum exploits time-series persistence — the tendency for an asset's recent return relative to the risk-free rate to predict its near-term direction. These are different phenomena driven by different mechanisms, and combining them produces better risk-adjusted returns than either alone.

The absolute momentum signal can be applied in two positions within a strategy's decision process. Pre-ranking application checks absolute momentum before selecting assets — only assets with positive absolute momentum are eligible for ranking. Post-ranking application (sometimes called "trend health") first selects the relative winner, then checks whether the winner passes the absolute test before committing capital. Both approaches achieve the same goal — preventing capital from being deployed when even the best available asset is not performing well enough to justify equity risk — but they can produce different portfolio compositions in edge cases where the relative winner would fail the absolute test.

Strategies That Use Absolute Momentum

• GEM — checks SPY's 12-month return vs 1-year T-bill rate before allocating to equities
• ADM and ADM-IP — checks blended 1/3/6 month score > 0
• CDM — applies post-ranking trend health check per module vs 3-month T-bill
• FAA — requires 4-month return > 0 for each selected asset
• TACBOND — requires positive 12-month return for bond positions
• DUAL-T6 — requires SMA ratio > 1.0 (price above moving average)

Why It Matters

Without absolute momentum, a tactical strategy would remain in equities during bear markets — simply holding whichever equity market is declining least steeply. Absolute momentum transforms a rotation strategy into a genuine risk management system by providing an explicit exit mechanism that moves the portfolio to safety when conditions deteriorate broadly. The 2008 financial crisis demonstrated its value: relative momentum alone would have kept investors in the less-bad equity market (international stocks initially, then US stocks), absorbing significant losses. Absolute momentum detected that both markets were underperforming T-bills and shifted the portfolio entirely to bonds, avoiding the worst of the decline.