Daily Speculations
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The Marathon Runner
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(address is not clickable)10/30/2005
Losing a Tail: A Momentum Study
When you race, the only time you pace -- or maintain momentum -- is when you are going strictly for time. A rabbited race. Then you arrange the pace with the rabbit sacrificing himself for the others to have a fast time.
Clearly, the markets don't usually have such a privilege. Most of the time the strongest cannot find such sacrificial lambs, or orchestrate a string of them.
Rather than time, a race usually, is about competition. If you are confident in your strength, a good strategy is to hammer, ease up, hammer, ease up. It takes the wind out of the tail. (The runner feeding off your efforts, drafting and pacing.)
The mile splits add to this. You hammer and ease before the split but still have a fast split. The fast split and the relaxation will make them think you had to back-off, that you are near the end also, but when you hammer again, the element of surprise, and often confidence is tested.
The following test of months with four-day streaks either positive or negative seem to show this. I looked at calendar months since 1995 and found that investing the month after a positive streak of occurred did seem to be positive. Unfortunately, following this strategy for this for October did not work.
The returns are lognormals to be additive.
Months with streaks of 4, positives and negative streaks on SPX.
Both
Type Month Pos Pos Neg Neither
Only Neg Only
Count 51 29.0% 26.0% 23.00%
Total Next Month 59.9% 30.9% -21.2% 22.23%
Average 1.17% 1.07% -0.81% 0.97%
Stdev 3.51% 3.92% 5.37% 5.53%
Z 2.39 1.47 (0.77) 0.84
The month in which the streak occurs does seem to have the ease of the pace.
Return During Mo. 142.5% 28.1% -85.8% 13.7%
Return after streak before end month in total for Positive streaks 12.86% for 1013 days in 80 months or 0.01% per day
Return after streak before end month in total for Negatives streaks 86.35% for 677 days in 55 months or 0.13% per day
In short if the market is confident it seems to employ a racers strategy to beat the competition. Perhaps more testing around split markers/monthend dates can show new momentum or lack of momentum strategies.
I will leave it to those counting butterflies to count if certain markets have duped others into leading the pace for them. But as I recall momentum investors shot up all over the place as the dot.com bubble peaked.