Can Individuals Exploit Stock Momentum?
September 3, 2014 - Momentum Investing
Can individual investors reliably extract excess returns from long-only stock momentum? In their April 2014 paper entitled “Profitable Momentum Trading Strategies for Individual Investors”, Bryan Foltice and Thomas Langer examine whether a long-only stock momentum portfolio holding the top one to 50 stocks outperforms the stock market on a net basis. Their approach avoids issues of shorting costs/feasibility and explores trade-offs between gross performance and trading frictions. Their baseline analysis: (1) ranks stocks based on six-month total return; (2) forms an equally weighted portfolio of the top 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 15, 20, 30, 40 and 50 stocks at the next close; (3) holds the portfolio for 12 months; and, (4) estimates net returns nine initial investment amounts ranging from $5,000 to $1,000,000. They approximate one-way trading friction a $10 commission plus a half bid-ask spread specified by range of market capitalization (0.21% to 0.75%) plus a relatively small SEC fee. For stocks retained from the prior portfolio, the bid-ask spread applies only to the change in position size from rebalancing to equal weight. Finally, they investigate whether employing overlapping portfolios of small numbers of stocks (forming portfolios more frequently than annually but still holding each portfolio for a year) suppresses volatility and improves risk-adjusted performance. They use buy-and-hold the S&P 500 Total Return Index as a benchmark. Using data for live and dead NYSE stocks with contemporaneous market capitalizations over $20 million during 1991 through 2010 (an average of 2,201 stocks per month), they find that: Keep Reading