Momentum experiment

Work by me looking at investing in the top momentum performers over 6 months.

It is an html rendered document from an ipython3 workbook. If anyone wants the original workbbok, then let me know, and I´ll make the link available. That way, you can play with the data yourself.

About mcturra2000

Computer programmer living in Scotland.
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2 Responses to Momentum experiment

  1. Ed Croft says:

    Fascinating reading… 5y momentum reversals are quite correlated with value… so using both 5y momentum reversals and shorter term momentum continuations is likely similar to a more traditional value & momentum portfolio. Would love to read your studies if you pursue further.

    I’m currently experimenting with residual momentum I don’t know if you have ever read up on the momentum ‘crash’ of 2008, but it worries me – using residual momentum helps to lower the risk. It’s a bit of work but I hope to include next year at some point.

    • mcturra2000 says:

      Thanks Ed for the reference. It will take me some time to read through and understand the paper.

      Yes, it’s certainly a dilema about momentum reversal. Perhaps the paper contains the answer I am looking for. I have a couple of ideas of my own, which will themselves take time to explore. There is one thing I had noticed: amongst the stocks that flew high and then crashed and burned, there was a greater concentration of stocks that did not have a five years worth of listing.

      Intuitively, if I asked someone how they thought momentum did over the last year, then they would probably say that it had done terribly. We all remember ASOS, for example; a great momentum and growth stock that just became too highly valued and suffered as a consequence. In actual fact, the momentum stocks did pretty good as a group.

      I didn’t see much of a correlation between value and improved momentum returns. When I had conducted a similar experiment over a year ago, it seemed that the highly valued or loss-making stocks did well. One company that sticks in my mind was TCG (Thomas Cook). It was a company on the verge of bankruptcy, but began to turn a corner. 5-year momentum would have been appalling. But if you had invested based on 6-month momentum, and ignored the PE ratio, you would have done well.

      A similar stock that we see today might be RBS (which I do not own). It has negative ROE, a PBV of 0.76, and a momentum score of 98. The value rank is only 37, but I think we’re actually seeing a recovery play in action, and hope it will prove me right. The market is telling us that the company is in dreadful shape, but getting better.

      I think that combining recovery play candidates with momentum is an interesting idea. The momentum is confirming your intuition about its recovery.

      Stop losses may also be an important factor in succeeding with momentum. They are a critical component of CANSLIM, for example. O’Neill has said so, and noted that when people did badly at CANSLIM, it could often be traced to not following his stop-loss rule.

      Another factor I’m thinking about is stocks that have “gone parabolic”. If a stock is more than say 25% above its 50dMA, and its RSI is over 70%, then you will probably do well to sell the stock. It’s very overbought at that stage, and you stand a big risk of a pullback.

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