Trend Clarity as Driver of Momentum Returns

Is momentum better measured by a granular fitted line or beginning-to-end return? In their March 2024 paper entitled “Trended Momentum”, Charlie Cai, Peng Li and Kevin Keasey investigate use of an analytically/visually clear linear stock price trend to enhance conventional momentum. They measure price trend clarity (TC) as R-squared for a regression of daily price versus date over the past 12 months. Specifically, they each month:

• Sort stocks into fifths (quintiles) based on conventional momentum, return from 12 months ago to one month ago.
• Further sort the top momentum quintile into finer quintiles based on TC.
• Form  equal-weighted or value-weighted portfolios of resulting sorts and compute their gross returns and 3-factor (market, size, book-to-market) alphas over the next six months.

To confirm use of TC to measure clarity of price trend, they separately conduct an experiment that relates analytical TC to trend clarity perceived by sample of 128 individuals each evaluating 10 pairs of stock charts. Their sample includes daily price data for U.S. common stocks from January 1927 through December 2020. Analyses requiring earnings start in 1964, while those involving investor sentiment span 1967 through 2018. They groom all variables to exclude outliers. In further analyses, they employ global stock price data. Using the specified methodology and data, they find that:

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