Quantitative Momentum: Guide to Building a Momentum-Based Stock Selection System [PDF]

Summary
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Quantitative Momentum: Guide to Building a Momentum-Based Stock Selection System Book

To make matters worse for the 52-week-high strategy, a basic long strategy that buys the portfolio of stocks based on nearness to the 52-week high isn’t that compelling. For example, the top decile 52-week-high portfolio, held for 3 months, earns a 14.15 percent CAGR. Not bad, relative to the market before transaction costs, but this CAGR is much lower than the simple price momentum top decile portfolio (discussed in Chapter 5) held for three months, which earned a 17.10 percent CAGR over the same period.

Overall, we are impressed with the story behind the 52-week-high concept, but we feel there is no robust evidence that the strategy is more effective than relative strength price momentum strategies. Nevertheless, the 52-week-high evidence does point in the general direction of the price momentum anomaly and serves as another data point, which highlights that momentum strategies likely exploit mispricing caused by marketwide underreaction to news.