Investing Research Articles

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Weekly Summary of Research Findings: 3/2/15 – 3/6/15

Below is a weekly summary of our research findings for 3/2/15 through 3/6/15. These summaries give you a quick snapshot of our content the past week so that you can quickly decide what’s relevant to your investing needs.

Subscribers: To receive these weekly digests via email, click here to sign up for our mailing list. Keep Reading

Aggregate Short Interest and Future Stock Market Returns

Are short sellers on average well-informed, such that aggregate equity short interest usefully predicts stock market returns? In the January 2015 draft of their paper entitled “Short Interest and Aggregate Stock Returns”, David Rapach, Matthew Ringgenberg and Guofu Zhou investigate the relationship between aggregate equity short interest and future stock market performance. They aggregate short interest as the equally weighted average of short interests as percentage of shares outstanding across individual stocks. They next detrend the aggregate short interest series to remove an upward linear trend. They then standardize the series to have a standard deviation of one and designate the result as the Short Interest Index (SII). Finally, they relate SII to future S&P 500 Index excess (relative to the one-month U.S. Treasury bill yield) returns at horizons of one, three, six and 12 months. They also compare SII to 14 other widely used stock market return predictors. Using monthly (mid-month) short interest data for U.S. stocks (excluding very small firms and low-priced stocks, but including REITs and ETFs), data for 14 other widely used U.S. stock market return predictors and S&P 500 Index excess returns during January 1973 through December 2012, they find that: Keep Reading

Simple Fidelity Bond Mutual Fund Momentum Strategy

A subscriber requested corroboration of the findings in “Simple Debt Class Mutual Fund Momentum Strategy” with a universe restricted to a family of bond funds (such as Fidelity) to enable low-cost fund switching. We therefore apply the strategy to the following ten Fidelity mutual funds:

Investment Grade Bond (FBNDX)
Intermediate Bond (FTHRX)
Government Income (FGOVX)
Mortgage Securities (FMSFX)
GNMA (FGMNX)
Short-Term Bond (FSHBX)
Limited Term Government (FFXSX)
Convertible Securities (FCVSX)
Intermediate Government Income (FSTGX)
Fidelity New Markets Income (FNMIX)

Per the prior test, we allocate all funds at the end of each month to the fund with the highest total return over the past three months (3-1). We determine the first winner in May 1994 to accommodate momentum measurement interval sensitivity testing. Using monthly dividend-adjusted closing prices for the ten funds during May 1993 (as limited by FNMIX) through January 2015 (261 months), we find that: Keep Reading

Interaction of Sentiment and Liquidity with Stock Return Anomalies

Are stock return anomalies strongest when investor sentiment is highest or liquidity lowest? In the January 2015 draft version of his paper entitled “What Explains the Dynamics of 100 Anomalies?”, Heiko Jacobs  addresses these questions. He first identifies, categorizes and replicates 100 well-known or recently discovered long-short stock return anomalies related to: violations of the law of one price, momentum, technical analysis, short-term and long-term reversal, calendar effects, lead-lag effects among economically linked firms, pairs trading, beta, financial distress, skewness, differences of opinion, industry effects, fundamental analysis, net stock issuance, capital investment and firm growth,
innovation, accruals, dividend payments and earnings surprises. He measures the gross magnitude and direction of these anomalies via long-short extreme decile (stocks in top and bottom tenths as ranked by a specific variable) portfolios. He then examines how gross three-factor (market, size, book-to-market) alphas for these anomalies vary with:

Using monthly data as available for a broad sample of U.S. stocks, excluding those that are relatively small and illiquid, as available during August 1965 through December 2011 (many tests start much later and end January 2011), he finds that: Keep Reading

Gas Prices and Future Stock Market Returns

Some experts argue that high (low) gasoline prices mean that consumers must allocate more (less) spending power to fuel, and therefore less (more) to other industries and stocks. Do data support this argument? To check, we relate U.S. stock market returns to changes in U.S. gasoline price changes. Using weekly average retail prices for regular gasoline in the U.S. and contemporaneous levels of the S&P 500 Index from late August 1990 through early February 2015 (1,279 weeks, with a six-week gap in gas prices at the turn of 1990 and a one-week gap in the S&P 500 Index in 2001), we find that: Keep Reading

Best Currency Value Strategy?

Which method of relative currency valuation works best for currency trading? In their February 2015 paper entitled “Currency Value Strategies”, Ahmad Raza, Ben Marshall and  Nuttawat Visaltanachoti run a horse race of four currency value strategies:

  1. Real Exchange Rate: nominal spot exchange rate with the U.S. dollar times the ratio of local consumer prices in local currency to U.S. consumer prices in U.S. dollars.
  2. Real Exchange Rate Change: one minus the ratio of the average real exchange rate between 5.5 and 4.5 years ago to the real exchange rate three months ago.
  3. Purchasing Power Parity: from the Organization for Economic Co-operation and Development (OECD).
  4. Big Mac Index: raw version from the Economist.

Their approach is to calculate excess returns in U.S. dollars from a portfolio that is iteratively long (short) the fifth of currencies that are most undervalued (overvalued) per each of these four metrics and hold the positions over periods ranging from one week to 12 months. Using weekly and monthly spot and forward foreign exchange rate data for 39 developed and emerging market currencies versus the U,S, dollar during January 1972 through July 2013, they find that: Keep Reading

Models, Trading Calendar and Momentum Strategy Updates

We have updated the S&P 500 Market Models summary as follows:

  • Extended Market Models regressions/rolled projections by one month based on data available through February 2015.
  • Updated Market Models backtest charts and the market valuation metrics map based on data available through February 2015.

We have updated the Trading Calendar to incorporate data for February 2015.

We have updated the the monthly asset class momentum winners and associated performance data at Momentum Strategy.

Weekly Summary of Research Findings: 2/23/15 – 2/27/15

Below is a weekly summary of our research findings for 2/23/15 through 2/27/15. These summaries give you a quick snapshot of our content the past week so that you can quickly decide what’s relevant to your investing needs.

Subscribers: To receive these weekly digests via email, click here to sign up for our mailing list. Keep Reading

Preliminary Momentum Strategy Update

The home page and “Momentum Strategy” now show preliminary asset class momentum strategy positions for March 2015. Differences in past returns among the top places are large enough that they are unlikely to change order by the close.

Exploiting Interaction of Hedge Fund Holdings and Short Interest

Do changes in hedge fund holdings and short interest in a stock together predict its returns? In their January 2015 paper entitled “Short Selling Meets Hedge Fund 13F: An Anatomy of Informed Demand”, Yawen Jiao, Massimo Massa and Hong Zhang test whether joint changes in aggregate hedge fund holdings and short interest of a stock relate to its future returns. They define a contemporaneous increase (decrease) in aggregate hedge fund holdings and decrease (increase) in short interest as indicative of informed long (short) demand for a stock. They relate informed demand to abnormal return, the return of the stock relative to that of its style benchmark based on size, book-to-market and prior-period return. Using size/value characteristics, monthly returns, quarterly short interest and holdings from quarterly SEC Form 13F filings of 1,397 hedge funds for 5,357 U.S. stocks during 2000 through 2012, they find that: Keep Reading

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