Its like value at risk, they model says you can get away with this much risk, but reality is often different.
Markets are not random. For many years studies after studies have shown two anomalies which make profits 1 PEAD- Post Earning Announcement drift 2 Momentum effect Hundreds of studies have shown this behavior continues in the market years after year. http://quantlogic.blogspot.com/2006/03/pocket-phd-post-earning-announcment.html Each quarter when companies report their earnings, there are usually a handful of companies whose earnings are either surprisingly good, or shockingly bad. You can immediately recognize these companies by the post earnings announcement jump or plunge in their respective stock prices. So far so good. But now fast forward, say, three quarters. If you take a look at all the stocks that had negative earnings surprises, you find that on average these stocks continued to go down. Similarly, the stocks that had positive earnings surprises continued to go up, on average. In other words, the stocks with earnings surprises exhibit post earnings announcement drift, or PEAD for short. Now this is weird. Every finance professor will tell you that this isn't suppose to happen. If the stock market is efficient, what should happen is a one-time jump in the stock price when earnings are announced. This PEAD effect was first identified in a paper published in 1968, almost 40 years ago. Generally, when research on market inefficiencies is published, people start trading against the inefficiency and the anomaly goes away. But not with PEAD. Subsequent papers have overwhelmingly found the same result. PEAD is considered one of the most robust stock market anomalies around. And, so far, nobody really knows why.... ------------------------------------------------- There is substantial evidence that indicates that stocks that perform the best (worst) over a three to 12 month period tend to continue to perform well (poorly) over the subsequent three to 12 months. Momentum trading strategies that exploit this phenomenon have been consistently profitable in the United States and in most developed markets. Similarly, stocks with high earnings momentum outperform stocks with low earnings momentum. This article reviews the evidence of price and earnings momentum and the potential explanations for the momentum effect. http://papers.ssrn.com/sol3/papers .cfm?abstract_id=299107 Why people don't trade them, because most people are lost in technical analysis jungle. Secondly many people trade on too short a timeframe to capture returns from such strategies. Some of the most profitable systems are based on these two key anomalies.
one of the best posts ever on elite. thank you, easyguru! can you please link me in to the actual 1968 paper? thank you, surf
http://links.jstor.org/sici?sici=0021-8456(196823)6:2<159:AEEOAI>2.0.CO;2-W You will probably have to buy it from one of the extract services. Since then there are several updated studies on this recently and it continues to show this effect.
The second study on momentum referred in my original post is titled Jegadeesh, N., and S. Titman, 1993, Returns to Buying Winners and Selling Losers: Implications for Market Efficiency, Journal of Finance http://ideas.repec.org/a/bla/jfinan/v48y1993i1p65-91.html There are several hypothesis as to why it works but the fact is it continues to work even today.
Isn't this the same basic method of Bill O'Neill's CANSLIM? Invest in stocks that are increasing revenue and profits quarter to quarter.....after each earnings announcement the stock brings in more and more investors with little corresponding selling. SteveD
Jim O'Shaugnessy is one of the big proponents of momentum investing and has had great returns using that (among other factors) at Bear Stearns. http://www.amazon.com/What-Works-St...ef=sr_1_1/102-5825823-8547342?ie=UTF8&s=books http://www.bsamonline.com/index_equity.htm - click on equity, then diversified moderate.
Yes and no. This method is slightly different and making it work involves different strategies. One of the key to making it work is to focus on earning season. It involves both long short strategies. IBD uses more an earning momentum method. One of the MarketWizards in the last book in series offers lot of hints about how to use it. I have few examples of actual recent trades like GROW, HSR. TRT etc using this method on my blog.
My research seems to say the momentum strategy did not work in the last two years for large/mid caps (2005, 2006).