Price momentum and value seem to be touted as the two most relevant factors in outperformance. I have seen that value as a lot of merit, but I have not seen that price momentum has any. If I run a screen on the Russell3K and use a simple rank of 52week% price change for the top 100, the performance is abismal. Can anyone comment on the success or failure of price momentum in returns?
Judgetrade has some interesting RTG’s based (as I understand it) on Value and Momentum. Check them out.
There is a lot of research done over the years (see SSRN) on the positive effects of price momentum on AR. 26 weeks seems to do better and you have to be careful about your sell rules. Price Mo seems to work best when combined with other factors, both fundamental and technical. Not as stand alone. I think the reason is that it does not include valuation so there is no predictive indicator of when one should sell. At least with moving averages you get a sell when the price breaks below an sma line, for instance. Just doing ranking by price appreciation does not give a signal. My 2 cents.
Price momentum is a well-established anomaly. There is a lot of research on this subject … you might start with O’Shaughnessy (What Works on Wall Street) and AQR’s own research for some historical data.
O’Shaughnessy’s Tiny Titans is a prime example of what might not work anymore. O’Shaughnessy himself has kind of come out against the smallest of the microcaps in his most recent edition. But also, at least price/sales with 52 week momentum just does not seem to work anymore for Tiny Titans (see AAII or FolioInvesting’s strategic Folio). Even with other value factors it seems that shorter time-frames have been working better in my limited backtesting universe, if it works at all.
Edit: just looked at Tiny Titans on AAII.org again. Arguably not bad.
O’Shaughnessy AAII article last fall: http://www.aaii.com/journal/article/what-works-key-new-findings-on-stock-selection
(what is absent is any talk of momentum in this one)
@Jim, curious if you have ever tried running a simulation of Tiny Titans as defined by AAII on P123. I have not taken the time to try it. I don’t have nearly the confidence in AAII data as I do P123 data .
–Tom C
So quick screen without slippage. 25 stocks 4 week rebalance. Is in line with AAII (they do not calculate slippage as you know) but without slippage questionable as a useful port. Also, I do not think I could stomach that drawdown. Took until 2013 to recover from the 2008 recession. Perhaps this is where I got my impression that Tiny Titans has not been working at all recently: perhaps true until say the last year or so. BTW, I am no longer a member of AAII so this is Tiny Titans from other sources and may not be exactly what AAII is using: mktcap >= 25, mktcap <= 250, Pr2SalesTTM < 1, top 25 stocks ranked by 52 week price performance, 4 week rebalance, no slippage
Looked on AAII, added NOOTC and Country(“USA”)=TRUE, ran as sim. Pretty dismal!!
https://www.portfolio123.com/port_summary.jsp?portid=1208534
–Tom C
You can also look at etfs or mutual funds that use this style of investment to determine whether others are able to make this work out of sample. Type in etf ticker, PDP, which is based on momentum. It has outperformed the spy over time.
Scott
Yes! And adding variable slippage to these microcaps did not help the backtested returns either. Not understanding slippage at the time (still not really knowing much) was one of the reasons I never invested when I subscribed to AAII. Good thing I didn’t invest in Tiny Titans at least.
Hi Jim:
Thanks for sharing, good stuff.
Some observations … as I recall O’Shaughnessy advises investors to stay away from the micro caps for a few reasons, chief among them the unfavorable bid/ask spread. It is doubtful the average investor would get the theoretical pricing inherent in these statistical studies and therefore achieve anything close to the sample performance (of course some of the skilled users here on P123 may be the exception). The fact that your screen has no slippage only underscores this point. In other words, out-of-sample performance will likely disappoint.
Obersvation # 2 … these momentum plays are often best paired with a tactical signal that keeps one out of the markets during downturns (e.g., observing moving averages or earnings trends for the benchmark).
Observation #3 … I wonder if the outperformance in small & micro-caps is due for some reversion to the mean. They’ve been outpacing the market since 1999 … we could be at a turning point. Just my $.02.
Thx,
Ed
Another momentum article, released today:
http://www.alphaarchitect.com/blog/2014/07/16/ride-winners-and-cut-losers-period/#.U8apmPldXAk
I guess my observation was that I never could find a strategy based only on momentum that I was impressed with. Even as part of a ranking system, I found that adding momentum ususally decreased returns. Just curious as to what others opinions were given that momentum is a common theme.
“Another momentum article, released today:”
Tom - someone really needs to check the calculations behind the charts that guy is producing. They don’t make sense.
Steve
I also find that sometimes adding momentum to a ranking system reduces returns.
I tend to trust fundamentals more than technicals. I’m okay with including momentum if it fits within the conceptual framework. It can be a bit of an art. Some of my R2G’s don’t have any momentum.
My suspicion is that momentum and technicals in general are more susceptible to over-optimization because they have more parameters to fiddle around with.
I believe there is benefit to using momentum in conjunction with value to help avoiding value traps. Also, the Canadian stocks are much more momentum based.
Steve