More often than not in investing, the trend is your friend. But from March 9th until June 16th the opposite was true: previous losers outperformed previous winners by a staggering 135% (best 10% minus worst 10% of O’Shaughnessey’s All Stock Universe).
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As pointed out by Jim O’Shaughnessey, there have been several other periods in which low momentum stocks outperformed high momentum stocks. In general, these periods are aligned with recessionary inflection points where stock leadership changes dramatically. Importantly, following the 10 worst periods for momentum investing, the strategy has returned to form and beaten the market by an average of roughly 7% annually over the subsequent 12 months.
We have noticed that high relative strength stocks seemed to have turned the corner in the last couple weeks.
I suspect we could be embarking on a favorable period for relative strength strategies.
Great commentary. Those who follow the blog might be interested in Jim O’Shaughnessy’s book “What Works on Wall Street” where he outlines those investment strategies that are truly successful on wall street. He examines 52 years of returns and various investment strategies. Jim concludes that RS is the only growth variable that consistently beats the market. Fascinating read.