Relative Strength Strategies Research Articles

Short-term Relative-Strength Strategies, Turnover, and the Connection between Winner Returns and the 52-week High

Short-term Relative-Strength Strategies, Turnover, and the Connection between Winner Returns and the 52-week High

Product market competition and intermediate-term momentum

This paper examines the relationship between product market competition and intermediate-term relative strength strategies in the U.S. over the past two decades, i.e., from 1997 to 2016. As industries become increasingly concentrated, I find that return reversal patterns are observable only in competitive industries. As the industry concentration level (ICL) increases, these patterns gradually disappear and reverse in the highly concentrated industry quintile. The performance of intermediate-term relative strength strategies is affected by not only the product market competition level but also recent recessions. In the sample, I find no reliable and robust momentum effect. These results shed new light on the relationship between the product market competition levels and the performance of intermediate-term relative strength strategies.

Contrarian Strategy or Relative Strength Strategy: An Evidence from The Turkish Stock Market in 2010s

Hisse senedi fiyatlarının geçmiş verileri kullanılarak gelecekteki fiyatların tahmin edilip edilemeyeceği, finans literatürünün en çok tartışılan konularından biri olmuştur. Finans literatürü, hisse senedi piyasalarında çeşitli anomalilerin varlığına ilişkin fikir birliğine varmıştır. Ancak aşırı tepki anomalisine dair bulgular halen çelişkilidir. Zıtlık stratejisi savunucuları “kazandıranları satma ve kaybettirenleri alma”nın normalüstü getiri sağlayacağını ileri sürerken göreceli güç stratejisi savunucuları tam tersini iddia etmektedir. Bu makale 2010’lu yıllarda Borsa İstanbul verisini kullanarak zıtlık veya göreceli güç stratejilerinin geçerliliğini incelemektedir. Portföy oluşturma dönemlerinde kazandıran portföyler, 2019 haricindeki tüm elde tutma dönemlerinde negatif normalüstü getiri sağlarken portföy oluşturma dönemlerinde kaybettiren portföyler tüm elde tutma dönemlerinde pozitif normalüstü getiri sağlamaktadır. Bulgular aşırı tepki hipotezini desteklemekte ve orta vadede kaybettirenlerin kazandıranlardan daha iyi performans gösterdiğini işaret etmektedir. Borsa İstanbul orta vadeli fiyat geri dönüşleri göstermekte ve yatırımcılar zıtlık stratejisi kullanarak normalüstü getiriler sağlayabilmektedir. Böylece Türkiye hisse senedi piyasasında zayıf formda piyasa etkinliğinin ihlali ortaya çıkarılmıştır. Aşırı tepkinin asimetrik olduğu ve kaybettirenlerdense kazandıranlarda gözlemlenebileceği sonucuna varılmıştır.

Does Momentum Investing Work in Indian Equities?

The purpose of this paper is to examine the existence and persistence of momentum, “the premier anomaly” according to Eugene Fama, as a source of out-performance in the Indian equity markets. We test a set of relative-strength strategies on twenty years of Indian equity markets data to validate whether momentum offers higher returns than a Buy and Hold approach. We add signals to the traditional momentum application to evaluate the impact on returns, volatility and draw-downs.

Relative Strength over Investment Horizons and Stock Returns

In this article, the authors propose a simple and novel measure of relative strength over investment horizons that synthesizes short- and intermediate-term price information. The relative-strength measure compares the short-term price trend with the intermediate-term price trend. The relative strength strategy generates substantial profits, which are greater than a simple sum of traditional short-term reversal and momentum profits. The superior performance of the relative strength strategy is evident after risk adjustments for various factor models and is robust across subperiods and different market conditions. These findings seem consistent with investor conservatism and the idea that investors are slow to adjust to new information. TOPICS:Analysis of individual factors/risk premia, factor-based models, style investing Key Findings • A novel relative-strength measure over investment horizons that synthesizes short- and intermediate-term price information can significantly predict subsequent short-term returns. • The relative-strength strategy generates substantial profits, which are greater than a simple sum of traditional short-term reversal and momentum profits. • The superior performance of the relative-strength strategy is evident after risk adjustments for various factor models and is robust across subperiods and different market conditions.

Absolute Strength: Exploring Momentum in Stock Returns

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 strategy of Jegadeesh and Titman (1993). Time-series regressions show that the returns to the absolute strength momentum strategy completely explain the returns to the relative strength strategy, 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.

Simple One ETF a Month Quantitative Asset Allocation System

We developed a simple easy to use “One ETF a Month” quantitative tactical asset allocation system that beats the SP500 Benchmark consistently. Our initial results show that a part time investor can beat the SP500 benchmark index by 900 basis points (9%) – effective doubling the SP500 benchmark return – annually. The proposed method uses the relative strength strategies combined with a momentum filter. The delayed signals from the system will be tracked on the econoscience.blogspot.com website.

Market Cycles and the Performance of Relative Strength Strategies

We study the effect of market cycles on both medium‐run and long‐run relative strength trading strategies. We find that payoffs for both strategies tend to be relatively higher within a market state (rising or falling markets), but substantially lower over transitions between states. Since shorter duration strategies are relatively less likely to include market transitions, our results help reconcile the puzzling fact that medium‐run strategies are profitable, but long‐run strategies are not. We find that the market's cross‐sectional return dispersion: 1) tends to be higher around market transitions, and 2) is negatively related to the subsequent payoffs for both medium‐run and long‐run strategies.

Market Cycles and the Performance of Relative-Strength Strategies

We study the effect of market cycles on both medium-run and long-run relative strength trading strategies. We find that the payoffs over both horizons tend to be relatively higher within a market state (rising or falling markets) but substantially lower when including transitions between states. Since shorter duration strategies are relatively less likely to include market transitions, our results help reconcile the puzzling fact that relative strength strategies are profitable over the medium-run but not profitable over the long-run. Our finding include that the market's cross-sectional return dispersion both: (1) tends to be higher around market-state transitions, and (2) is negatively related to the subsequent relative-strength payoffs for both horizons.

New Evidence on Short-Term Reversals in Monthly Stock Returns: Overreaction or Illiquidity?

We re-examine contrarian relative-strength profits in one-month stock returns with a focus on: (1) the post-discovery vs.pre-discovery evidence, (2) size-based variation, and (3) time-series patterns. Over the last two decades since the initial documentation in the academic literature, profits to the one-month relative-strength contrarian strategy appear to have weakened substantially. In fact, reversals for this strategy are only evident for small-cap stocks in the post-discovery sample. Further, we find that the reversal profits are reliably higher following periods of high realized stock market volatility; where, following from Nagel (2012), we interpret the lagged return volatility as a state variable that indicates time-variation in the return to liquidity provision. We also find that the reversals are much stronger in January for both the pre-and post-discovery periods. For the post-discovery period, only the small-cap stocks exhibit reliable reversals for the non-January months. Our collective findings suggests that the one-month relative-strength strategy can be characterized as a weakening illiquidity-related phenomenon.

Can diversification degree amplify momentum and contrarian anomalies?

PurposeThe purpose of this paper is to analyse the impact of industrial diversification on the profitability of contrarian and momentum strategies.Design/methodology/approachUsing monthly returns, the weighted relative strength strategy (WRSS) is applied to 249 American listed stocks from January 1994 to April 2004. To study the impact of the 2000 crash on the results, the WRSS strategy during the 01/1994‐03/2000 and 04/2000‐04/2004 sub‐periods was implemented. Then, firms are classified, according to the intensity of their industrial diversification by Ward's method of hierarchical cluster analysis, into two sub‐samples: the diversified and non‐diversified samples. The WRSS strategy was re‐implemented on these sub‐samples. Finally, the Bootstrap without replacement is used to explore the risk‐based explanation of the trading strategies' profitability.FindingsResults show that the momentum strategy seems to be no more profitable in the recent years. In fact, while momentum strategies earn large positive and significant returns before the 2000 crash, these returns are negative after the crash. Moreover, before the crash, the momentum effect was more pronounced for the non‐diversified sample. After the crash, a contrarian effect more important for this sample was identified. Finally, the Bootstrap without replacement results do not support the risk‐based explanation.Research limitations/implicationsFuture research may study the impact of diversification on investor psychology.Practical implicationsDiversified firms are efficiently valued. However, specialized firms are not correctly valued.Originality/valueThis is the first study that shows that contrarian or momentum portfolios formed by industrial diversification did not yield significant return.

Low-cost momentum strategies

This paper analyses the impact of trading costs on the profitability of momentum strategies in the United Kingdom and concludes that losers are more expensive to trade than winners. The observed asymmetry in the costs of trading winners and losers crucially relates to the high cost of selling loser stocks with small size and low trading volume. Since transaction costs severely impact net momentum profits, the paper defines a new low-cost relative-strength strategy by shortlisting from all winner and loser stocks those with the lowest total transaction costs. While the study severely questions the profitability of standard momentum strategies, it concludes that there is still room for momentum-based return enhancement, should asset managers decide to adopt low-cost relative-strength strategies.

Are Anomalies Still Anomalous? An Examination of Momentum Strategies in Four Financial Markets

In this paper we test the profitability of momentum strategies in the United Kingdom, Germany, Japan, and China over the period 1991 to 2006 and sub-periods. Both RSS (Relative Strength Strategies) and WRSS (Weighted Relative Strength Strategies) are used to form the momentum portfolios. As a result, we find that the United Kingdom and Germany exhibit rather stable medium-term return continuation for both RSS and WRSS over the entire sample period and sub-periods, while Japan shows a medium-term return reversal over the sub-period 1991-1998. As for China, we report momentum profits over the period 1995-2006 and the sub-period 2001-2006 with RSS. Furthermore, we use the results of RSS to check the influence of risk factors and transaction costs on the momentum returns, as well as calendar effects and other characteristics of momentum portfolios reported in the literature. With the results of WRSS, we examine the relative importance of time-series predictability and cross-sectional variation in accounting for the profits of momentum strategies.

Relative Strength Strategy in Indian Stock Market: 1990-2007

This paper examines the momentum effect in Indian stock market using the J month/ K month methodology of Jegadeesh and Titman (1993, 2001). The study is organized into two parts. In the first part, we document the interaction between past returns in predicting future returns. Having established that the relative strength strategies are on average quite profitable, in the second part, we examined whether the momentum profit is attributed to any seasonality effect. Our empirical result reveals that the returns of the winner portfolio in case of all four different J's (3 months, 6 months, 9 months, and 12 months) are highest in the first month post portfolio formation and then they are gradually declining. Second, there is no clear month of the year effects in momentum profits. The study sets out direction for future research in Indian stock market.

Low-Cost Momentum Strategies

The article analyses the impact of trading costs on the profitability of momentum strategies in the UK and concludes that losers are more expensive to trade than winners. The observed asymmetry in the costs of trading winners and losers crucially relates to the high cost of selling loser stocks with small size and low trading volume. Since transaction costs severely impact net momentum profits, the paper defines a new low-cost relative-strength strategy by shortlisting from all winner and loser stocks those with the lowest total transaction costs. While the study severely questions the profitability of standard momentum strategies, it concludes that there is still room for momentum-based return enhancement, should asset managers decide to adopt low-cost relative-strength strategies.

Style Timing in Emerging Markets

Historical evidence suggests that relative-value and relative-strength strategies have cycled in and out of favor in emerging country selection. As such, style timing appears potentially rewarding. A risk-aversion proxy could be useful to distinguish between times when relative-value or relative-strength strategies outperform. The authors propose a criterion for style timing supported by psychological evidence that prior results affect subsequent risk-taking behavior. The authors find that a strategy using a relative-value (relative-strength) indicator following negative (positive) market performance presents consistent risk-adjusted performance that is superior to that resulting from either the relative-value or relative-strength strategies. <b>TOPICS:</b>Emerging markets, portfolio construction, in portfolio management

The illusory nature of momentum profits

Our paper re-examines the profitability of relative strength or momentum trading strategies (buying past strong performers and selling past weak performers). We find that standard relative strength strategies require frequent trading in disproportionately high cost securities such that trading costs prevent profitable strategy execution. In the cross-section, we find that those stocks that generate large momentum returns are precisely those stocks with high trading costs. We conclude that the magnitude of the abnormal returns associated with these trading strategies creates an illusion of profit opportunity when, in fact, none exists.

Relative strength strategies in China's stock market: 1994–2000

In this paper, we examine the profitability of intermediate- and long-horizon relative strength strategies (buying past winners and selling past losers) over the July 1994–December 2000 interval in China's stock market. We find a negative average return to relative strength strategy over a horizon of 6 months to 2 years. We also document that firm size, book-to-market, and beta effects are qualitatively similar to those in the US and other markets, that is, small stocks outperform large stocks, value stocks outperform growth stocks, and betas do not appear to be associated with average stock returns. Further, we show that, when returns are adjusted for the three factors in Fama and French [J. Financ. Econ. 33 (1993) 3], the predictable pattern in returns disappears. Hence, the stock return behavior in China is not inconsistent with the rational risk-based pricing model.

The Illusory Nature of Momentum Profits

In markets with trading friction, the incorporation of information into market prices can be substantially delayed through a weakening of the arbitrage process. We re-examine the profitability of relative-strength, or momentum, trading strategies (buying past strong performers and selling past weak performers). We find that standard relative-strength strategies require frequent trading in disproportionately high-cost securities so that trading costs prevent profitable strategy execution. In the cross section, we find that those stocks that generate large momentum returns are precisely those stocks with high trading costs. We conclude that the magnitude of the abnormal returns associated with these trading strategies creates an illusion of profit opportunity when, in fact, none exists.