Momentum investing is an investment approach that focuses on stocks with large increases or decreases in price. It assumes that the price trend will continue. Basically, it says buy when the price is increasing and sell when the price is decreasing.
Momentum investors typically buy on positive earnings surprises and sell on negative ones.
In The 52-Week High and Momentum Investing, Thomas J. George and Chuan-Yang Hwang state that:
There is substantial evidence that stock prices do not follow random walks and that returns are predictable. Jegadeesh and Titman (1993) show that stock returns exhibit momentum behavior at intermediate horizons. A self-financing strategy that buys the top 10% and sells the bottom 10% of stocks ranked by returns during the past 6 months, and holds the positions for 6 months, produces profits of 1% per month. Moskowitz and Grinblatt (1999) argue that momentum in individual stock returns is driven by momentum in industry returns. DeBondt and Thaler (1985), Lee and Swaminathan (2000), and Jegadeesh and Titman (2001) document long-term reversals in stock returns. Stocks that perform poorly in the past perform better over the next 3 to 5 years than stocks that perform well in the past.
- The 52-Week High and Momentum Investing, THE JOURNAL OF FINANCE • VOL. LIX, NO. 5 • OCTOBER 2004