I tested on ChatGPT today to see if getting out of a stock when its voume falls compared to its norm, and you can add 1.4% CAGR by doing so when

ADV10 / ADV90 < 0.50

Effects versus baseline:

CAGR: 19.06 → 20.48% (+1.42%)
Sharpe: 0.702 → 0.734
MDD: −54.7 → −54.0%
Beta: 0.700 → 0.688
Recovery: 1892d → 1716d

The interesting thing is that essentially everything improved simultaneously:

CAGR ↑
Sharpe ↑
beta ↓
recovery time ↓
drawdown slightly ↓

That is unusual. But it only improved results if you checked daily and got out when daily dollar volume showed the drop-off, not if you waited to check on your normal new trading date.

By your normal next trade date: 82% were no longer top 5
65% were no longer even top 10.
So the dollar volume deterioration predicted you were going to be getting out of those stocks anyway, and would get you out early if you check daily.
For stocks triggering the volume rule:

Return period Avg return if you ignored signal and held
Next month -1.8%
Next 3 months -3.6%
Next 6 months -2.9%

For normal held stocks:

Return period Avg return
Next month +2.1%
Next 3 months +5.2%
Next 6 months +8.4%

The interpretation matters.

This looks much more like:

early warning of rank deterioration

than:

a separate volume factor with independent predictive power

The sequence appears to be:

stock becomes a momentum winner
investor attention cools (dollar volume fades)
returns flatten
momentum rank falls
monthly system eventually removes stock

The daily rule mainly gained by doing:

sell several weeks earlier.

Mechanical Investing FAQ

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