I’ve been watching the momentum of different asset classes, in order to determine what to own. So far, it’s worked extremely well. When stocks aren’t in favour, investors may profit from owning bonds or gold. When bonds are out of favour, and investor might do well by owning large cap stocks, small cap stocks, or emerging market stocks. Each of these asset classes tend to move differently.
Individual stocks don’t seem to necessarily move differently, in the way that asset classes do. Large cap stocks all tend to move with the market, except when news is reported that affects earnings or expected profitability. As I applied my momentum methodology to large cap stocks, I found very few stocks that moved differently enough that I could form a portfolio. When I did, the portfolio had high turnover (short holding periods) and disappointing performance.
By owning 5-8 stocks over a period of a month and a half, the large cap stocks that I picked and traded, based on momentum, have under performed the TSX by over 5%. But what was worse was noting that certain stocks moved from in favour to extremely out of favour, and then back in favour over a small number of weeks.
Perhaps the issue is the ranking formula I used. I ranked all the stocks against each other, giving equal weight to fundamental criteria (P/E and debt-equity ratios) and momentum criteria (price growth) which overweighted recent time periods. The goal was to benefit from both value and momentum styles, but the results have been disappointing. Perhaps removing the value screen and investing purely by momentum would yield improved results.