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Article Archive: Momentum Investing

Moving average distance and momentum
01/28/24   Momentum Investing
"Our research suggests that active managers should pay attention to the distance between short- and long-run moving averages of prices in developing models for forecasting equity returns. We show that trading rules based on this distance present significant profits in historical data after accounting for reasonable trading cost estimates."

Momentum review
11/19/23   Momentum Investing
"The pervasiveness of momentum returns provides perhaps the strongest evidence against the efficient market hypothesis. We find positive momentum returns in the post-2000 period in markets throughout the world, long after the phenomenon was first documented. We do not find support for risk-based explanations of momentum but find that behavioral theories provide insights about why we observe momentum in some markets but not in others. Nevertheless, we find it surprising that with the important exception of the US, most markets that exhibited momentum before 2000 continue to exhibit similarly strong momentum in the post-2000 period."

Reducing momentum crashes
07/23/23   Momentum Investing
"Stocks far from peaks outperforming stocks near peaks during the market rebounds are the key to understanding the economic channel behind momentum crashes and momentum profits' time-variation."

Reducing momentum crashes
05/21/23   Momentum Investing
"Momentum crashes are a blight on the performance of momentum strategies. Although there has been a fair amount of research on the topic, few practical solutions have emerged to mitigate the impact on portfolios. In this study, the authors document the outperformance of momentum stocks, made somewhat 'immune' to momentum crashes , by including stocks far away from their peak position relative to stocks very near their peaks. Turns out the outperformance is very large. It also accounts for the majority of negative momentum performance."

Thematic vs momentum investing
10/28/22   Momentum Investing
"If asset managers are unable to select the winning themes, it is highly unlikely that the average investor can. Given this, it is much better to pursue momentum investing, which at times may include stocks from exciting industries. Boring and simple, but effective."

Mind the momentum gap
10/28/22   Momentum Investing
"Huang's findings are of interest, as he appears to have found a simple heuristic that could add value to a momentum strategy by providing a timing mechanism based on the Momentum Gap and significantly reducing the risk of momentum crashes."

Momentum after valuation peaks
09/18/22   Momentum Investing
"Momentum investing also performed well following episodes when value stocks were cheap. Of course, momentum portfolios did not perform nearly as well as value portfolios, but they did still beat the generic market."

Avoiding momentum crashes
08/07/22   Momentum Investing
"Remarkably, crashes are driven by large gains of previous losers while winners still exhibit modestly positive returns."

Momentum by day or night
07/10/22   Momentum Investing
"Yashar Barardehi and his colleagues performed an interesting experiment. They took all US-listed stocks from 1963 to 2019 and calculated the returns of these stocks during the day (when markets were open) and overnight, as well as the usual 24-hour full-day return. Then they formed momentum portfolios and looked at their performance in the subsequent weeks and months."

Glamour momentum
05/14/22   Momentum Investing
"we see that building a momentum portfolio solely on stocks trading above 10x P/S is a bad idea (not surprising). One would lose about 3.5% annually compared to the simple momentum portfolio."

Momentum in emerging markets
03/06/22   Momentum Investing
"Perhaps investors should be skeptical of implementing the strategy in certain markets and heavily discount theoretical returns, but there is still an overwhelming amount of financial research that supports the factor across developed stock markets, where trading stocks has become very cheap, and asset classes, where futures can be used."

What explains momentum?
02/04/22   Momentum Investing
"There is as yet no consensus on why equity markets permit momentum. Our analysis uses out-of-sample international data to consider a 'horse race' across momentum rationales based on overconfidence, slow diffusion of information, limited attention, anchoring bias, and real options. Our central finding in cross-sectional analyses is that the frog-in-the-pan (FIP) hypothesis, which posits that due to limited attention, investors underreact to information that arrives gradually rather than in concentrated doses, consistently wins. Also, internationally, momentum is stronger in less volatile markets and in up-markets. Information flows more gradually during these market states, implying additional support for FIP."

Short-term momentum
11/06/21   Momentum Investing
"We begin our analysis by analyzing the short-term momentum characteristics of developed stock markets. Momentum is defined as measuring the stock markets. return last week, and if positive, then go long, while if negative, then go short. The trade signal is delayed by one day and portfolios are created each day to achieve an implementable and robust trading strategy."

Global trend following
10/24/20   Momentum Investing
"The bottom line is that, given the diversification benefit and the downside (tail risk) hedging properties, an allocation to trend-following strategies does merit consideration. Note, however, that the generally high turnover of trend-following strategies renders them relatively tax-inefficient, and they can be susceptible to whipsaws. Thus, investors should strongly prefer to hold such strategies in tax-advantaged accounts and focus on the long-term benefits of trend following."

A strategic approach to rebalancing
08/30/20   Momentum Investing
"They provide two alternatives. The first is to include an allocation to trend following, as trend tends to perform well during extended market downturns. The second is to strategically rebalance based on trend signals - if the trend-following model suggests that stock markets are in a negative trend, rebalancing is delayed."

Seasonality factor
08/01/20   Momentum Investing
"Different variations of dual momentum or trend following show similar results. Rebalancing during the first two trading days of the month gives better results than rebalancing on other days of the month or on a weekly basis."

Bad momentum bets
07/18/20   Momentum Investing
"In factor land, one ugly myth, like a zombie that refuses to die in a B Hollywood movie, is that the market capitalization-weighted benchmark is a good Momentum bet."

Momentum plus long-term reversal
07/11/20   Momentum Investing
"Two of most documented anomalies in the asset pricing literature are the momentum effect and the long-term reversal effect. Momentum is typically defined as the last 12 months of returns excluding the most recent month (i.e., months 2 - 12) because it tends to show a reversal, which some have attributed to microstructure (trading) effects in which securities that have outperformed recently tend to continue to outperform. The long-term reversal effect is typically defined as the returns from month t - 13 to t - 60, in which securities that have outperformed for a long time tend to see a reversal in performance."

Momentum plus long-term reversal
07/04/20   Momentum Investing
"Combining the alpha momentum and reversal strategies into the blended signal produces a superior return predictive signal, outperforming the individual momentum and reversal strategies."

Improving momentum strategies
06/06/20   Momentum Investing
"The results of going long the best 10% and short the worst 10% for the traditional 12-month momentum strategy are already impressive, but if one selects only the stocks that overlap and appear in both the 12-month and 6-month momentum strategies, it gets even better."

The Factor Archives: Momentum
12/11/19   Momentum Investing
"The chart clearly demonstrates that stocks with high momentum outperform the universe, offering an excess return of 4.3% annually. On a risk - adjusted basis, these stocks also outperform, with a Sharpe Ratio 1.5x higher than the All Stocks Universe (0.58 vs. 0.35). Finally, they are also consistent, outperforming in 91% of the 648 rolling.three-year periods."

Enhance momentum strategies
10/11/19   Momentum Investing
"A strategy that buys small value winners and sells large growth losers (MAX strategy) generates significantly larger momentum profits than a standard momentum strategy, is robust to common return controls and does not suffer from return reversals for holding periods up to 3 years."

Improving momentum
05/20/19   Momentum Investing
"The Momentum factor has two issues: a recent lack of performance and an image problem. We highlight that the performance of Momentum can be improved by combining it with other factors or implementing a volatility filter. However, despite highly attractive long-term returns, investors have allocated magnitudes more capital to Value than to Momentum strategies. Partially this is explained by the simplicity of Momentum, which seems unappealing to many sophisticated investors. Naturally better performance would also lead to higher allocations, so these two issues are somewhat circular."

Momentum in Imperial Russia
04/03/19   Momentum Investing
"Some of the leading theories of momentum have different empirical predictions that depend on market composition and structure. The institutional theory predicts lower momentum profits in markets with less agency. Behavioral theories predict lower momentum profits in markets with more sophisticated investors. One risk-based theory predicts occasional momentum crashes. In this paper, we use a dataset from a major 19th century equity market to test these predictions. We find no evidence to support the institutional theory due to the lack of delegated management. We exploit a regulatory change in the middle of our sample period to test behavior theories. We find evidence consistent with overreaction theories of momentum. We find no evidence to support a rare disaster theory."

Whither fragility
01/22/19   Momentum Investing
"Those wanting to reduce short-term volatility can add a modest allocation to bonds instead of using multiple lookback models. This would be easier to do, less costly, and potentially more tax efficient. Results are also better."

Dual momentum fragility
01/16/19   Momentum Investing
"By simply diversifying across multiple implementations, we can dramatically reduce model specification risk and even potentially see improvements in realized metrics such as Sharpe ratio and maximum drawdown."

Trend following tracking error
11/01/18   Momentum Investing
"The tracking error to a trend following strategy is large. When tracking error goes against you, this is an extremely painful process one can endure. Human emotions get involved - which is generally not good for investment decisions."

Extended GEM backtest
10/22/18   Momentum Investing
"We usually want as much data as we can get to confirm an investment strategy. But we also have to consider how realistic our results will be under earlier conditions. Dynamic global investing, for example, makes little sense during the two World Wars."

Momentum for retirement
08/07/18   Momentum Investing
"Under every withdrawal rate scenario tested, from 3.4% to 12%, the median portfolio managed to more than double the initial investment after 30 years despite withdrawals of various sizes. Further, as a 'risk of ruin' measure, only when the withdrawal rate approached or exceeded 10% did any risk at all appear that the account balance would dip below half of the original amount invested at any time within the 30 years."

Simple momentum
07/16/18   Momentum Investing
"This simple momentum strategy would have grown at 10.5% for the last 91 years, compared to 10.1% for the index."

Momentum's magic number
07/16/18   Momentum Investing
"We find similar results, with performance peaking when the formation period plus the holding period is equal to 12-to-14 months."

Momentum strategies have produced standout results
07/02/18   Momentum Investing
"Yet momentum investing works when practised rigorously and systematically. In fact, it has beaten the market over 211 years of U.S. stock market history, from 1801 to 2012, according to AQR Capital Management, which is based in Greenwich, Connecticut. It has also performed well in 40 other countries and for more than a dozen types of assets other than stocks. Heck, some researchers have found that momentum even works when it comes to trading baseball cards." [$]

Cliff Asness interview
06/25/18   Momentum Investing
"AQR Capital's Cliff Asness, a rare combination of Great Investor and Financial Thought Leader shares his views and strategies."

Sector vs country momentum
06/19/18   Momentum Investing
"This short research note shows that long-short Momentum portfolios of sectors or countries in European stock markets generated positive excess returns over the last two decades."

52 week high and the Q-factor
06/19/18   Momentum Investing
"Firms with high momentum (close to 52-week high) and low asset growth perform the best."

Explanations for momentum
04/10/18   Momentum Investing
"Our findings show that at least a substantial part of U.S. and international momentum profits represents a risk premium for the exposure of the strategy to systematic crash risk"

Common misconceptions about momentum
04/10/18   Momentum Investing
"With so much information available, it is not be surprising that many analysts have missed seeing some of the research. Based on the way momentum is generally used, it is clear to me that there are some serious misconceptions about it. Here is my discussion of some of the more serious ones."

Momentum in Imperial Russia
03/27/18   Momentum Investing
"Some of the leading theories of momentum have different empirical predictions that depend on market composition and structure. The institutional theory predicts lower momentum profits in markets with less agency. Behavioral theories predict lower momentum profits in markets with more sophisticated investors. One risk-based theory predicts occasional momentum crashes. In this paper, we use a dataset from a major 19th century equity market to test these predictions. We find no evidence to support the institutional theory due to the lack of delegated management. We exploit a regulatory change in the middle of our sample period to test behavior theories. We find evidence consistent with overreaction theories of momentum. We find no evidence to support a rare disaster theory."

A momentum signal
01/29/18   Momentum Investing
"Historically, the S&P 500 has been followed by above-average returns over the next 6, 12, 24, and 36 months when this cyclical momentum measure is above 85."

You can have your momentum factor and eat it too
12/11/17   Momentum Investing
"We don't address this in the paper, but I would argue that this finding - that momentum is implementable at low cost - holds even more strongly when it's part of a multi-factor portfolio, where factors that complement momentum, like value, will dampen turnover. All considered, we find that momentum is quite implementable in real life."

A terrible strategy
05/21/17   Momentum Investing
"But historically waiting for the market to fall has been an abysmal strategy, far worse than buying and holding in both absolute and risk-adjusted terms."

Idiosyncratic Momentum
05/07/17   Momentum Investing
"They found that despite similar performances over the first year, these momentum portfolios perform dramatically differently beyond year one - relative-return momentum reverses strongly (producing returns of -0.40 percent per month in months 13 through 60), while abnormal-return momentum continues for years (producing returns of 0.20 percent per month in months 13 through 60)."

Q and A with Wes Gray
02/26/17   Momentum Investing
"The article suggests that the world of investment ideas is almost like religion or politics - you're on one team or the other - but you can't be on both teams at the same time, and there's very little room for conceptual overlap across dissonant ideas. So if you are a value investor, the idea of momentum disgusts you. Similarly, if you are a momentum/technical investor, the idea of value investing is horrid."

Factor zoo
02/26/17   Momentum Investing
"Factor-based investors and advisors now think they have an advantage. They base this belief on the results of theoretical asset pricing models, many of which have failed empirically."

Mistakes of momentum investors
12/04/16   Momentum Investing
"It is important to remain focused on what is important - accumulating wealth while protecting yourself from severe bear markets. Once you have a good investment strategy, you need to be patient so it can do its work for you. Warren Buffett said the stock market is a mechanism for transferring wealth from the impatient to the patient. This applies to momentum as well as other investors."

Momentum with indexes
11/20/16   Momentum Investing
"Investors can take advantage of momentum with funds that apply the strategy to individual stocks, or apply it directly using ETFs offering exposure to equity sectors, single countries, or individual asset classes."

Dead or just painful
09/11/16   Momentum Investing
"On the one hand, stock-selection momentum strategies can have the potential to generate excess expected returns over the long run; on the other hand, these strategies sometimes generate massive amounts of investor pain when they inevitably go through long bouts of poor relative performance. It's a kind of quid pro quo: in order to access the potential gain, you must willing to accept the potential pain."

Largest momentum strategy
05/22/16   Momentum Investing
"Buying during a bear market is probably one of the most difficult things an investor can do, but staying invested as stocks rise may be a close second. There are constant temptations to 'take money off the table' or 'de-risk your holdings' after a nice run-up. It's not easy to allow compounding to occur without getting in the way and screwing things up."

Why is momentum neglected?
01/31/16   Momentum Investing
"It should come as no surprise that the same irrationality causing momentum to work in the first place also keeps investors from accepting and using it. Behavioral economists have long shown that people are consistently irrational."

Trend following backtest
01/09/16   Momentum Investing
"I'm going to conduct a comprehensive backtest of three popular trend-following market timing strategies: the moving average strategy, the moving average crossover strategy, and the momentum strategy. These are simple, binary market timing strategies that go long or that go to cash at the close of each month based on the market's position relative to trend. They produce very similar results, so after reviewing their performances in U.S. data, I'm going to settle on the moving average strategy as a representative strategy to backtest out-of-sample."

MiB: Michael Covel
01/09/16   Momentum Investing
"On this week's Masters in Business radio podcast, I speak with Michael Covel, author of Trend Following and Turtle Trader. Covel is a student of trading, and has helped demystify a number of fascinating aspects of how top traders achieve their greatness."

Backtesting: a cautionary tale
12/18/15   Momentum Investing
"The failure to see consistent outperformance from the group as a whole has made me increasingly skeptical of investment approaches that claim to be data-driven. In my view, such approaches receive too much trust and respect, and not enough scrutiny. They hold a reputation for scientific credibility that is not deserved."

Momentum deterioration
12/18/15   Momentum Investing
"Buying high momentum has had a rough 15-years relative to longer-term history, but avoiding poor momentum has continued to work quite well."

A conversation with Cliff Asness
11/21/15   Momentum Investing
"Tyler and investment strategist Cliff Asness discuss momentum and value investing strategies, disagreeing with Eugene Fama, Marvel vs. DC, the inscrutability of risk, high frequency trading, the economics of Ayn Rand, bubble logic, and why never to share a gym with Cirque du Soleil." [video]

Absolute strength
08/16/15   Momentum Investing
"We document a new pattern in stock returns that we call absolute strength momentum. Stocks that have significantly increased in value in the recent past (absolute strength winners) continue to gain, and stocks that have significantly decreased in value (absolute strength losers) continue to lose in the near future. Absolute strength winner and loser portfolio breakpoints are recursively determined by the historical distribution of realized cumulative returns across time and across stocks. The historical distribution yields stable breakpoints that are always positive (negative) for the winner (loser) portfolios. As a result, winners are those that have experienced a significant upward trend, losers are those that have experienced a significant downward trend, and stocks with no momentum have cumulative returns that are not significantly different from zero. The absolute strength momentum strategy is related to, but different from, the relative strength momentum strategy of Jagadeesh and Titman (1993) and the time series momentum strategy of Moskowitz, Ooi, and Pedersen (2011). Time-series regressions show that the returns to the absolute strength momentum strategy completely explain the returns to the relative strength and the time series momentum strategies, but not vice versa. Absolute strength momentum does not expose investors to severe crashes during crisis periods, and its profits are remarkably consistent over time. For example, an 11-1-1 strategy that buys absolute strength winners and sells absolute strength losers delivers a risk-adjusted return of 2.42% per month from 1965-2014 and 1.55% per month from 2000-2014."

Why momentum investing works
07/12/15   Momentum Investing
"Even if you aren't a practicing value investor, the value anomaly is easy to explain - buy at a discount and then wait. The momentum factor is based on buy high, sell higher or alternatively, cut your losses and let your winners run. Value investing is based on a long-term reversion to the mean. Momentum investing is based on that gap in time that exists before mean reversion occurs. Value is a long game, while momentum is usually seen in the short- to intermediate-term."

Momentum and stop losses
06/20/15   Momentum Investing
"Stop losses and other trend following methods are a way to head off some of the usual pitfalls of human judgement, such as the disposition effect, loss aversion, ambiguity aversion, and flight-to-safety. There is no reason why they should not be used by all momentum investors."

Momentum across time
06/13/15   Momentum Investing
"One conclusion we can draw from these results is that whether we are talking about the equity premium, the value premium or the momentum premium, investors require patience and discipline - aided by strong belief - to benefit from most strategies."

215 years of global multi-asset momentum
06/13/15   Momentum Investing
"Extending price return momentum tests to the longest available histories of global financial asset returns, including country-specific sectors and stocks, fixed income, currencies, and commodities, as well as U.S. stocks, we create a 215-year history of multi-asset momentum, and we confirm the significance of the momentum premium inside and across asset classes. Consistent with stock-level results, we document a large variation of momentum portfolio betas, conditional on the direction and duration of the return of the asset class in which the momentum portfolio is built. A significant recent rise in pair-wise momentum portfolio correlations suggests features of the data important for empiricists, theoreticians and practitioners alike."

52-Week High and Momentum Investing
11/15/14   Momentum Investing
"That is, the price level, relative to a reference point (the 52-week high), seems in this context to be an even more powerful price predictor than momentum in isolation. And while reversals do occur for momentum stocks, 52-week high stocks do not reverse."

The remarkable truth about 52-week highs
08/16/14   Momentum Investing
"if one of your stocks hits a new 52-week high, you probably shouldn't be nervous. In fact, perhaps you should be excited."

Fact, fiction and momentum investing
05/10/14   Momentum Investing
"It's been over 20 years since the academic discovery of momentum investing, yet much confusion and debate remains regarding its efficacy and its use as a practical investment tool. In some cases 'confusion and debate' is us attempting to be polite, as it is near impossible for informed practitioners and academics to still believe some of the myths uttered about momentum - but that impossibility is often belied by real world statements. In this article, we aim to clear up much of the confusion by documenting what we know about momentum and disproving many of the often-repeated myths. We highlight ten myths about momentum and refute them, using results from widely circulated academic papers and analysis from the simplest and best publicly available data."

Absolute momentum
04/07/13   Momentum Investing
"There is a considerable body of research on relative strength price momentum but relatively little on absolute, time series momentum. In this paper, we explore the practical side of absolute momentum. We first explore its sole parameter - the formation, or look back, period. We then examine the reward, risk, and correlation characteristics of absolute momentum applied to stocks, bonds, and real assets. We finally apply absolute momentum to a 60-40 stock/bond portfolio and a simple risk parity portfolio. We show that absolute momentum can effectively identify regime change and add significant value as an easy to implement, rule-based approach with many potential uses as both a stand- alone program and trend following overlay."

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