Blog - Investing Notes
Blog Synthesis: Momentum Investing/Trading
Does stock price momentum really exist? If so, why, and how can traders exploit it? Here is a listing of past blog entries related to momentum investing/trading.
Amplifying Momentum Returns with Idiosyncratic Volatility ...evidence suggests that investors may be able to enhance exploitation of downside momentum by focusing on stocks with high idiosyncratic (non-beta) volatility.
Alternative Sector ETF Momentum Metrics ...evidence from simple tests does not support a belief that alternative measurements of momentum beat past six-month return for a sector ETF momentum strategy.
The 2000s: A Market Timer's Decade? (Revised 2/9/10 to insert "long-only" based on a reader comment) ...any long-only timer of the U.S. stock market who did not beat the market during 2000-2009 has some explaining to do.
Simple Sector ETF Momentum Strategy Robustness/Sensitivity Tests ...evidence from a rough ranking interval sensitivity test does not support a belief that a simple sector ETF momentum strategy reliably outperforms an appropriate benchmark.
Simple Sector ETF Momentum Strategy Performance (Updated 12/23/09 to add robustness test and correct calculation errors) ...simple sector ETF momentum strategies have generally outperformed the broad stock market over the past decade for reasonably low trading frictions.
Upside Down Beta Distributions for Value and Momentum? ...value-beta and momentum-beta relationships can and recently have reached such extremes that value and momentum strategies may impound untended assumptions about the future market trend.
Mutual Fund Momentum Measure Fly-off ...evidence suggests that past six-month fund return is a stronger indicator of mutual fund momentum than either nearness of fund net asset value to its one-year high or a more abstract sensitivity of fund returns to stock return momentum.
Enhancing Asset Class Momentum with Downside Risk Avoidance? ...evidence from simple tests does not support a belief that adding a downside risk factor materially enhances the performance of a momentum-driven tactical asset class allocation strategy.
Interplay of Beta with Momentum and Contrarian Investing ...evidence from mutual funds suggests that momentum (contrarian) investors/traders can enhance returns by focusing on stocks with high (low) beta.
Momentum a Big Mistake? ...evidence indicates that investors and analysts tend to extrapolate current earnings shocks and discount their predictable reversion. This shortsightedness manifests as the momentum effect, reflected in both stock prices and analyst cash flow forecasts.
Combining Momentum and Moving Averages for Asset Classes ...a very limited test suggests that adding simple moving average signals to asset class momentum investing may enhance returns.
A Few Notes on The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets ...The Ivy Portfolio offers investors a well-reasoned, well-documented, easily understood and easily implemented approach to long-term, self-directed portfolio management based on disciplined asset class diversification enhanced by momentum. While investors should expect to underperform the modeled level of returns, the approach has considerable support from formal research.
Combining Value and Momentum Across Asset Classes ...a portfolio that combines value and momentum strategies across global equity markets and other asset classes may offer investors relatively high returns with low volatility.
The NoLoad FundX Mutual Fund Momentum Approach ...while research generally supports belief in an intermediate-term momentum effect, it is not obvious that the FUNDX mutual fund substantially exploits the effect. Investors may be able to capture more of the effect by applying the NoLoad FundX approach more purely themselves.
Four Factors and Two Regimes ...equity investors may want to alternate between momentum and value investing styles as the overall stock market varies from low-volatility to high-volatility states.
An International Test of Momentum Strategies ...medium-term momentum investing may be profitable in most, but not all, international equity markets.
Time for Momentum ETFs? ...momentum and contrarian ETFs based on long-only partitions of broader indexes might offer individual investors practical and diversified access to the momentum factor, and to the associated longer-term contrarian reversal.
The Decision Moose Asset Allocation Framework ...the Decision Moose asset allocation framework may offer investors a way to beat buying and holding broad U.S. equity indexes by occasionally trading to the "hottest hand" from a broad set of asset classes.
Enhancing Momentum Returns with Stylishness ...investors/traders may be able to enhance momentum trading strategies by focusing on stocks that fit most strongly into a growth or value style.
Momentum Returns for Large Caps ...momentum trading strategies generally offer significantly positive alpha for large-capitalization U.S. stocks, but the strategies may not work during bear markets.
Exploiting Industry Momentum Via ETFs? ...after accounting for trading frictions, medium-term long-short industry momentum strategies implemented via sector/industry ETFs do not offer abnormal returns.
Returns of High-Momentum Stocks Around Earnings Announcements ...traders may be able to exploit an attention-driven anomaly for very high momentum stocks by going long from five days before to the morning after earnings announcement and short the next five days.
Testing Momentum and Contrarian Commodity Futures Returns ...commodity futures long-short momentum strategies may offer both good average returns and effective diversification of a stocks/bonds portfolio.
The Pervasiveness and Persistence of Momentum ..."The momentum effect, both in the UK and globally, has been pervasive and persistent. Though costly to implement on a standalone basis, all investors need to be acutely aware of momentum. Even if they do not set out to exploit it, momentum is likely to be an important determinant of their investment performance."
Fama and French Dissect Anomalies ...some anomalies are stronger and more consistent than others. Momentum appears to be the strongest and most consistent.
Combined Value-Momentum Tactical Asset Class Allocation ...value and momentum investing may work across a broad range of asset classes, and the two effects are independent enough that combining them may yield incremental outperformance.
Bubbles: Ride, Watch or Play the Pop? ...riding asset bubbles (guided only by information on past returns) is on average an attractive but volatile investing strategy.
When Momentum Does and Doesn't Work ...momentum investing strategies are generally more (less) successful when the dispersion of returns across individual stocks or industries is relatively low (high).
Trading Friction as a Momentum Killer ...successful momentum trading may depend critically on restricting consideration to stocks with the lowest total transaction costs.
The 52-Week High as a Momentum Indicator for Individual Stocks ...the 52-week high is on average a superior indicator of positive momentum for individual stocks (except for a January reversal).
Loss of Momentum? ...the stock return momentum effect wasn't there, then it was there for a long time, and now it's gone.
An Investor's Asset Class Momentum Trading Strategy ...an asset class momentum trading strategy may favorably tilt the risk-reward playing field for investors who systematically apply it.
Long-Term Outperformance from Trends Defined by Moving Averages ...this simple moving average trend-following model is a risk-reduction technique that signals when to be long a risky asset class with potential upside, and when to be sitting in cash.
Follow the Leaders to Capture Short-term Abnormal Returns ...mimicking the most informative actions of outperforming investors/traders reliably generates abnormal short-term returns. Such behavior may explain some of the momentum effect.
Selling Too Soon, and Holding on Hope? ...data from Taiwan strongly supports the conjecture that investors avoid taking losses so that they do not have to admit mistakes.
Momentum Strategies Sputtering? ...there are a lot of twists and turns to momentum strategy returns. Momentum players should pay attention to the subtleties.
Combining Momentum and Value Styles ...investors can enhance returns by combining value and momentum styles, leaning toward momentum when the yield curve is normal and value when the yield curve is inverted.
Trading Signals from Retail Investor Behavior ...if you want to make money following the retail investor herd, you have to get in and out within weeks. For longer-term outperformance, bet against the herd.
Dow Theory Long Dead? Not So Fast, My Friend ...the Dow Theory has generated excess risk-adjusted (but not raw) returns when compared to buy-and-hold over some significant periods by following large trends.
Buying on Impulse (Change in Momentum) ...focusing on stocks with both high six-month momentum and rapidly increasing six-month momentum offers significant excess returns.
The Disposition Effect as a Driver of Momentum's Excess Returns ...the disposition effect may serve as the bootstrap of momentum investing by retarding the impact of good (bad) news for stocks with large unrealized capital gains (losses).
Momentum Investing: Surfing Waves in the Economy? ...momentum investing works (again!), driven partly by reward for the risk of the unusual but transitory sensitivity of high-momentum stocks to overall economic growth.
Why Momentum Investing Works? ...momentum investing works, and abnormalities in the distribution of returns for momentum-driven portfolios may partly explain why.
Unbalanced Attention? If you are a momentum or reversal trader, you want stocks in the news, thereby de-coupling their price behavior from the market/sector and increasing the probability of overreaction. If you are a seeker of (out of the news) "hidden gems," you want undervaluation of the associated sector and overall market as well as the stock, because low attention indicates a relatively high degree of co-movement.
Going with the Flows ...front-running the predictable effects of unusual mutual fund inflows and outflows on stocks held in common offers significant excess returns.
Smart Mutual Fund Investing? ...mutual fund inflows naively chase past returns.
In summary, momentum trading seems to work, offering several paths to excess returns.
