Click on this link to view a paper prepared by Dorsey Wright & Associates Money Management which presents their findings relating to their study of investing in stocks on the basis of 1-month to 5-year relative performance.
In 1993, Jegadeesh and Titman published the paper, “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency.” Their research showed momentum strategies based solely on historical pricing data outperformed over time. This was a serious blow to the Efficient Market Hypothesis because it had been commonly assumed no investment strategy based solely on publicly available data could outperform the market over time. Their work has spawned scores of research papers on the topic of momentum and relative strength. Over time, research has shown that momentum exists over intermediate time horizons. Momentum also exists across asset classes, countries, and in many other areas. There has been so much research showing that momentum works that academics no longer dispute its value as an investment factor.
The paper is an easy read and may give you some investing ideas. For example, when my timer goes long you could buy ETF’s covering two of the top performing sectors over the past six months.
As per the above chart, if you were to buy two ETF’s based on the best six-month performance you would select XME (Metals) and XLY (Consumer Discretionary).
The folks at Dorsey Wright have a blog called Systematic Relative Strength which is worth a look.
FJP
