Momentum Investing

Does designated creditworthiness, closely related to riskiness, drive the performance of many widely acknowledged stock return anomalies? In the April 2010 revision of their paper entitled “Anomalies and Financial Distress”, Doron Avramov, Tarun Chordia, Gergana Jostova and Alexander Philipov use portfolio sorts and regressions to investigate the relationship between financial distress (low credit ratings and downgrades) and profitability for trading strategies based on: stock price momentum, earnings momentum, credit risk, analyst earnings forecast dispersion, idiosyncratic volatility, asset growth, capital investments, accruals and value. Using data for broad samples of U.S. stocks (limited by extensive information requirements) spanning October 1985 through December 2008, they conclude that: Keep Reading

Can investors enhance momentum returns for individual stocks with combination strategies that incorporate other technical and accounting indicators? In the April 2010 draft of their paper entitled “Technical, Fundamental, and Combined Information for Separating Winners from Losers”, Cheng-Few Lee and Wei-Kang Shih investigate combined momentum strategies based on past stock returns, past trading volume and sets of fundamental (accounting) indicators. They consider two distinct sets of fundamentals: Piotroski’s FSCORE for value stocks and Mohanram’s GSCORE for growth stocks. Their combined strategy is long (short) past winners (losers) with weak (strong) past relationship between returns and trading volume and high (low) fundamental scores. Using stock return/volume and firm fundamentals data for a broad sample of NYSE and AMEX non-financial stocks spanning 1982-2007 (26 years), they find that: Keep Reading

A reader observed and asked: “There are two strategies, both of which appear to work, but which also seem contradictory to each other. Momentum says what goes up must go up further. Reversion says what goes up must come down. Both work? There must be something wrong here?!? Keep Reading

Are signals form firm earnings and revenue momentum additive to that from stock price momentum? In their March 2010 paper entitled “Price, Earnings, and Revenue Momentum Strategies”, Hong-Yi Chen, Sheng-Syan Chen, Chin-Wen Hsin and Cheng-Few Lee examine the profitability and of a revenue momentum strategy, both standalone and in combination with price and earnings momentum strategies. They measure price momentum based on past stock returns, and earnings and revenue momentums with respect to historical earnings and revenues (not surprises relative to analyst forecasts). Using stock return, earnings and revenue data for a broad sample of U.S. stocks spanning 1974-2007, they conclude that: Keep Reading

A reader commented and asked: “I am interested in Mebane Faber’s 10-month SMA timing strategy, as it seems to match the market with less risk and outperform other moving average strategies I’ve seen. Based on the results of ‘Is There a Best SMA Calculation Interval for Long-term Crossing Signals?’, it seems that Faber’s strategy is not brittle as far as choosing an 8-, 10-, 12- or 14-month SMA. However, what if I were to trade on a day other than the end of the month? Would I get drastically different results? If so, that might suggest that Faber’s choice of day is ‘data mining’ and the performance of his strategy may not persist.” Keep Reading

Various studies find that returns on individual stocks exhibit tendencies for short-term (one month) reversal, medium-term (3-12 months) momentum and long-term (2-5 years) reversal. The short-term reversal is the basis for the skip-month included in some medium-term momentum strategies. Is there a way to concentrate the short-term reversal? In the March 2010 update of their draft paper entitled “Industries and Stock Return Reversals”, Allaudeen Hameed, Joshua Huang and Mujtaba Mian examine monthly return reversal using stocks grouped into 24 industries, reasoning that such groups share common sources of return correlations. Using return, industry and characteristics data for a broad sample of NYSE/AMEX stocks spanning 1963-2006, they conclude that: Keep Reading

Does positive feedback trading, indicated by an adjusted measure of return autocorrelation, enhance momentum profitability? In the February 2010 version of their paper entitled “Positive Feedback Trading Activities and Momentum Profits” [apparently removed from SSRN, thus casting doubt on its credibility], Thomas Chiang, Xiaoli Liang and Jian Shi examine the relationship between positive feedback trading and profitability of momentum strategies. The momentum parameters for their investigation are a six-month ranking interval followed by a six-month holding interval. Measurement of positive feedback trading is for a six-month window coinciding with the momentum ranking interval. Using daily stock return data for a broad sample of U.S. stocks spanning 1985-2005, they conclude that: Keep Reading

A reader asked whether Lussenheide Capital Management’s momentum timing mechanism (100-day NASDAQ Composite Index moving average crossings, with proprietary filter) beats buy and hold over the long run, noting that the company’s web site presents at “Trend Following Performance” an independently validated annualized return of over 16% for “a very simple trend following system.” The discussion of performance states: “The systems used here at…Lussenheide Capital Management Inc., uses [sic] this basic system, along with a mechanical, proprietary trading filter. Although our returns are comparable or better with those shown below, our system has more desirable characteristics, including fewer trades and less whipsaws amongst others.” The notes at the bottom of the performance table state that results exclude “fund expenses” and “advisory management fees.” Without the specifications for the proprietary filter, we can test only basic concepts directly. Using daily closes of the NASDAQ Composite Index and daily dividend-adjusted closes for various potential trading vehicles through 2/12/10, we find that: Keep Reading

A reader asked: “Have you done any backtesting to compare value investing versus market timing? Magic Formula Investing seems to rank #1 in value investing and Decision Moose seems to stand out for market timing. Is there any direct comparison between Magic Formula Investing vs. Decision Moose?” Keep Reading

A reader asked: “If you have some thoughts on the claims in the article ‘The Capitalism Distribution’ by Blackstar Funds, LLC, I would be most interested in hearing them.” Keep Reading