Momentum: Not Monthly, but Daily

Andrew Haldane of the Bank of England recently had a remarkable chart showing the success of momentum investing. Being in the market the month following an “up” month has historically creamed a buy-and-hold strategy.
The problem is that the data was wrong. Well, not wrong exactly but it was the wrong data. Haldane was using a monthly average for the index instead of the close. When you use the close, the chart looks very different.
Still, historically there’s been a very strong momentum effect. Instead of looking at monthly totals, I once looked at daily changes. The stock market has done very well on days following “up” days, and it’s done poorly on days following “down” days.
I found that the market’s entire capital gain has come on days following +0.64% or more gains. That’s only about 20% of the time. The other 80% of the time, the market is net flat. “Half the market’s gain came on day’s following 3.2% up moves. On average, that happens slightly less than once a year.”
While this strategy has been very successful historically, the impact has faded greatly over the past 15 to 20 years.

Posted by on September 20th, 2010 at 1:08 pm


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