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diconoclastx
Advanced Member
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Getting this feeling, the stocks that are favored in this market environment have switched from fundamentally superior momentum stocks, to oversold, short covering stocks. Unfortunately, many p123 systems I and others use include the '52wk % change' factor in it, or some factor that results in those with the greatest '52 wk % change' being found. Anyone would like to offer opinions on how long this divergence will last and suggestions on how to combat this? |
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olikea
Advanced Member
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I confirm you results..... Because of issues recently with performance of various sectors of the market, I have started up some large stock portfolios based on single factors, with the aim of monitoring how stocks with certain characteristics are behaving. Take a look at my "momentum monitoring" port: http://www.portfolio123.com/port_summary.jsp?portid=338541 200 stocks based on a single factor: sma(50)/sma(200), as you can see, it has signficantly underperformed. Essentially, I believe the reason for the weakness is simple: Momentum stocks tend to attract a lot of "fast money", i.e. speculative money that is following the trend. If you imagine that stocks are made up of two types of investors, "fast money" and "slow money". The former is switching in and out of stocks, and is responsible for volatility. The latter is more a buy-and-hold investor, looking for values with a long time horizon. The first people to sell are the "fast money" investors, while "slow money" investors are much less likely to sell because of a market downturn, in fact they are more likely to buy. Because momentum stocks have a higher percentage of "fast money" investors than non-momentum stocks, during a selloff they decline faster. One way to avoid the problem is to not include momentum as a factor. For example, I have a version of 3rd Generation with momentum taken out: http://www.portfolio123.com/port_summary.jsp?portid=325210 Compare to: http://www.portfolio123.com/port_summary.jsp?portid=314289 Look at the drawdow graphs. During corrections, the portfolio with momentum has higher drawdowns. Notice how in 2006, the drawdown spike of the momentum free port was 15%, vs. nearly 20% for the port with momentum. Ditto a similiar scenario in 2007. ** In my view higher momentum stocks are unquestionably riskier. (Though highly *negative* momentum stocks are equally risky too!). I don't think investing in momentum stocks really is "money for nothing", the higher expected returns geniunely compensate for higher risk. In my view, the only way to avoid this issue is to use portfolios that do not include momentum as a factor. Over the long term, the returns will be lower, however, the drawdowns will be lower too. You pays your money you makes your choice.... |
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olikea
Advanced Member
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Just to look at the issue further, I decided to have a go at hacking out momentum from my 4th Generation ranking system. Here is the (original) 4th Gen sim: http://www.portfolio123.com/port_summary.jsp?portid=342181 And then without momentum factors: http://www.portfolio123.com/port_summary.jsp?portid=344655 Without momentum, the overall returns are a bit lower, and MAX drawdown is higher, but have a look at the drawdown graphs, with and without momentum factors. You can clearly see, that having momentum clearly increases the severity of the majority of drawdowms. P.S. isn't it remarkable that a port with no stoplosse, no trend following factors, none of the usual "risk control" stuff, has a max drawdown of just 20%, including a major bear market? ---------------------------------------- 
4th gen drawdown.png
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4th gen drawdown NO MOMENTUM.png
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---------------------------------------- [Edit 1 times, last edit by olikea at Jan 23, 2008 5:59:12 PM] |
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dcnelson
Advanced Member
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I haven't done the quant work you have on this issue but as a fund manager it has been my experience that in bear mkts or at least deep corrections there is a change of leader ship which appears to be happening now. Stocks near the bottom of our models tend to out perform the 1st 3-6 months. It will be a while before the new leadership is appearing at the top of our models. Like many our models for the last few years have done exceedingly well yet in the last few weeks have been destroyed. At one point yesterday the IBD 100 list was down nearly 6% and ended down 3.5%. A lot of the momentum stocks you are describing are on that list. Have to work from a different playbook for a while. |
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crakes
Advanced Member
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You guys had it figured out back in 2008! Hope you went with it! See the paper I updloaded to day - Momentum Crashes - confirms that momentum stops working after a crash. Stopped working in the Great Depression as well (Figure 4 in the paper). I will add one very important and investment worthy point: by the time I figure these sorts of things out, the tables have already started to turn. So maybe momentum is about to resume... ---------------------------------------- [Edit 1 times, last edit by crakes at Dec 12, 2012 8:49:01 PM] |
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plan_trader
Advanced Member
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Crakes, Where is the paper you mentioned? Thnx ---------------------------------------- Gary |
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crakes
Advanced Member
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See this post: http://www.portfolio123.com/mvnforum/viewthread?thread=5668 |
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judgetrade
Advanced Member
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Great Diskussion, Thank you! Olikea, thank you for those two sims, great work that I will use! My Portfolios do have momentum Faktor and they still work in this market so far... Andreas |
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