Melding Momentum and Stock Portfolio Management Practices
February 13, 2012 - Momentum Investing
It is arguable that many stock momentum strategy tests derive more from logical/programming simplicity than common portfolio management practices. Does momentum work for portfolios of U.S. stocks when melded with the latter? In the January 2012 update of his paper entitled “Relative Strength and Portfolio Management”, John Lewis tests individual stock momentum in the context of real-world stock portfolio practices. After initial selection of top stocks, he replaces weakening stocks with strong ones as needed rather than at a fixed interval, depending on four parameters: (1) momentum ranking interval; (2) number of stocks in the portfolio; (3) buy rank threshold; and, (4) sell rank threshold. To test robustness, he conducts multiple trials based on random selection of stocks above the buy rank threshold. Specifically, he presents nine examples of 100 iterations of 50-stock portfolios randomly selected from the top 10% of the S&P 900 (S&P 500 large-cap plus S&P 400 mid-cap) based on momentum ranking intervals of one month to five years, replacing stocks when they fall out of the top 25%. Portfolios are apparently equally weighted at initial formation. Examples ignore dividends, management fees and trading frictions. Using daily returns (excluding dividends) for the S&P 900 stocks over the period 1996 through 2011 (16 years), he finds that: Keep Reading