Over-reacted

Jegadeesh and Titman also found that the zero-cost winners minus losers portfolio realized positive returns in each of the 12 months after the formation date. However, the longer-term performance of these past winners and losers reveal that half of their excess returns in the year following the portfolio formation date dissipates within the following two years.

So based on these two studies, it appears that in the US, share price momentum persists over a shorter period of up to 12 months. By which time, investors had over-reacted to the positive or negative developments in the company and a reversal takes place between the second and third year.

Whether Singapore stocks follow similar patterns is a question which can only be answered by more extensive empirical work. Meanwhile, I tried to look at momentum trading on a daily and weekly basis and found no consistent and exploitable patterns. I regressed the returns of 11 stocks against their previous day's returns between January 1997 and June 2002. Seven (Datacraft, Keppel Corp, SPH, CityDev, UOB, Chartered, and GES) showed mild positive correlation. That is to say on the whole, a positive return today tends to be followed by a positive return the next day.

However, most are not statistically significant. The regressions of the return of SingTel, SIA, Fu Yu, and Ionics against the day befores gave negative coefficients. The negative serial correlation of the daily returns of SingTel and SIA are significant, but not that of Fu Yu and Ionics. There arent any obvious patterns in the weekly returns either. So there you have it. If these 11 stocks are anything to go by, there are no sure-win momentum trades based on daily or weekly prices.

We started five portfolios on Feb 4, 2003 to track the performance of the various trading strategies. One of the portfolios is made up of stocks which had suffered the biggest loss in the last one year. Another consisted of top gainers in the last one month. As at end April, 2004, the one year top losers portfolio was the best performer. It had appreciated by 135 per cent and had outpaced the Straits Times Index by 93 percentage points.

Meanwhile, the one-month top winners portfolio had done the worst. It was up by only four per cent and lagged the STI by some 38 points. Another portfolio made up of stocks with the lowest price-to-book ratio was the second best performer. It was up 115 per cent from its dummy capital, and was ahead of the STI by 73 percentage points. The portfolio made up of stocks with the lowest price earnings ratio was in third place, having appreciated by 57 per cent and beating the STI by 15 points.