Top-performing stocks from the past six months are likely to do well over the next six months, too. That's particularly true of shares that are hitting new highs.
Value investors might cringe at that logic, but momentum-based trading strategies have been the subject of extensive research. A study published in the Journal of Finance in 2004 compared a handful of such strategies using returns for U.S. stocks from 1963 to 2001. Each was a "long/short" strategy designed to isolate the predictive ability of a single variable. One strategy mimicked buying shares that had been top gainers over the past six months while selling short (or betting against) those that had been top losers. If price momentum showed no predictive ability, the buys and sells would have offset each other for a net return of zero. Instead, returns averaged nearly 0.38% a month (or 4.6%, annualized), but began to fizzle after six months.
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Top-performing stocks from the past six months are likely to do well over the next six months, too. That's particularly true of shares that are hitting new highs.
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