Introduction
The purpose of this 3-part series of articles is to provide information about the potential benefits of momentum investing. In this series, I will try and explain what momentum is, the potential returns available to momentum investors, and the way that Porter Capital combine mechanical, rules-based strategies with the momentum effect to deliver benefits to investors.
The ‘premier’ anomaly
Since its initial discovery by DeBondt & Thaler in 1985[1], the momentum effect has been documented and researched in many markets worldwide.
Many traders and investors would know of the academic notion of the ‘efficient’ market, and the implication that this efficiency has on the ability of investors and traders to earn profits.
What you may not be aware of is that the father of the ‘efficient market hypothesis’, Eugene Fama, refers to momentum as “the premier unexplained anomaly”[2]. In other words, the success of momentum based investing is regarded by many as an exception to the efficient market hypothesis.
What is it?
In its simplest terms, momentum refers to buying stocks which exhibit past over-performance. Research shows that stocks which have exhibited strong performance over some defined historical period, have a tendency to continue to exhibit strong performance for some number of future periods. It means that investors can potentially hitch a ride on strong momentum stocks. In part 2 of this series, I will use simulations to explore the potential risks and rewards of the momentum approach.
A Typical Momentum Trade
The typical momentum trade has a history of clearly defined direction and strength. Figure 1 shows a chart of price activity for ALL (Aristocrat Leisure), from August 2004 to April 2005. During late August 2004, there is a clear price breakout on very heavy volume. This marks the start of the momentum opportunity. Over the next few months, the price activity demonstrates clearly defined direction.
Is it credible?
The momentum effect has been widely researched and documented in both the international and Australian equity markets. For example, Rouwenhorst[3] tested momentum strategies in 12 European markets using data from 1980 to 1995, and found that momentum returns were present in every country, and their effects lasted for approximately one year. Griffin et al.[4] found support for the profitability of momentum investing in over 40 countries, and concluded ‘Globally, momentum profits are large and statistically reliable in periods of both negative and positive economic growth’.
Momentum has been thoroughly researched in virtually all of the worlds equity markets. Momentum effects have also been documented in other asset classes, such as foreign currencies[5], commodities[6] and real estate[7].
It is fair to say that the momentum effect appears to be one of the most beneficial effects for investors. Thorough research appears to indicate that momentum based investment does not increase investment risk, and that momentum effects are present during both economically good and bad cycles.
When does it work best?
Like all investment approaches, momentum investing is subject to the vagaries of the investor. For many investors, poor returns are not so much a function of their investment strategy, but of their own implementation of that strategy.
All investment strategies benefit from the increased discipline and accountability that mechanical, rule-based trading brings, particularly during difficult investment cycles. I will discuss this topic in more detail in the third part of this momentum series.
Friday, March 19, 2010
Present market situation.
For Singapore and HK market....kind of getting tired and in need of a rest but can still find some movements for the 2nd and 3rd liner shares. Of course...the Index stocks are still being supported but due to rotation and the high share price plus the cost of commission which make buying them a big risk.
For 2nd and 3rd liner shares ( so called penny stocks ), one has to scan thru all of them and checked to see if got one of them have got any news or theme for them to move up. If not...also not a good bet as the traders must take into consideration of the price movement range and profit-to-risk ratio.
As the market gets higher....the risk is also higher. Same as in mountain climbing.....the higher you go, the harder is to breath ( air got thinner theory haha ).
At present...my main concern is to focus on 2 "big" lots of stocks. SMIC ( 500lots ) and Global Bio-Chem ( 80 lots - after selling off 100 lots to cushion and cover the pain from the screw-up for SMIC and Alibaba ).
Btw I still managed to make....about 1K+ of unrealised profit at the end of the day due to the gain from the newly bought SMIC shares. Ave price for the 480 lots was at 82.7 cents and the closing price was at 84 cents.
I may want to focus just on HK and SGX penny shares for now to trade....also decided to hold the vested level to about 30% funding level from present 45% whenever have a chance to clear.
Stocks to keep an eye on :
SGX - Midas ( already BP today ), Biosensors ( Lowest K-line and at near support level of 78 cents ) and Oceanus ( low K-line and at BP level ).
HK - Global Bio-Chem : HK0809 ( low K-line and just break peak ), Shenzhen Int'l :
HK0152 ( already BP ) and Fosum Int'l : HK0656 ( low K-line and near BP level ).
For 2nd and 3rd liner shares ( so called penny stocks ), one has to scan thru all of them and checked to see if got one of them have got any news or theme for them to move up. If not...also not a good bet as the traders must take into consideration of the price movement range and profit-to-risk ratio.
As the market gets higher....the risk is also higher. Same as in mountain climbing.....the higher you go, the harder is to breath ( air got thinner theory haha ).
At present...my main concern is to focus on 2 "big" lots of stocks. SMIC ( 500lots ) and Global Bio-Chem ( 80 lots - after selling off 100 lots to cushion and cover the pain from the screw-up for SMIC and Alibaba ).
Btw I still managed to make....about 1K+ of unrealised profit at the end of the day due to the gain from the newly bought SMIC shares. Ave price for the 480 lots was at 82.7 cents and the closing price was at 84 cents.
I may want to focus just on HK and SGX penny shares for now to trade....also decided to hold the vested level to about 30% funding level from present 45% whenever have a chance to clear.
Stocks to keep an eye on :
SGX - Midas ( already BP today ), Biosensors ( Lowest K-line and at near support level of 78 cents ) and Oceanus ( low K-line and at BP level ).
HK - Global Bio-Chem : HK0809 ( low K-line and just break peak ), Shenzhen Int'l :
HK0152 ( already BP ) and Fosum Int'l : HK0656 ( low K-line and near BP level ).
Silly trading mistakes
Due to my working half day yesterday...and by the time I got home, it was already 2am and to cool down....I ate some fruits and watched CNBC. Saw that the Dow was up and I went to sleep about 3am....didn't really sleep well. Drank coffee at work....so
eyes closed....but brain still "up and running".
Woke up at 8.30am and got ready for the market opening. Normally after checking the status of the US markets closing then checked the morning market status for the region. After that, I would log-in and adjusted my contingent stop-loss orders. Since market was "up" everywhere....adjusted the price for stop-loss for all my outstanding shares on hand. For SMIC....I set it at HK$0.80 from HK$0.76, since the share price has gone up to HK$0.85...and when market "open" it was trading around 85/86 cents range. For the rest....I actually lower them.
Yes...today I did a couple silly trading mistakes. First, was that I took my eyes off my Alibaba counter and the stock dropped from HK$17.10 to HK$16.60 causing me to carry a unrealised loss of HK$3,000, the other one was even worst. After the lunch break, my pc "hanged" at the start so I logged off then re-start it. By the time, it was operating I saw that the share price for SMIC has started to drop from 84 to 82 cents....but before I can get into the system to adjust my stop-loss price it triggered the 1st lot at 80 cents for 280 lots...I managed to adjust the 2nd lot of 280 lots from 79 to back to 76 cents. SHIT....immediately saw a realised loss of
S$2.5K on my MFG platform thingy and I was like "blink, blink away" at the screen. Then....the price started to recover to 82/83 cents range. I just went in for 220 lots at 82 cents to make up for my share target of half mil ( 500 lots ). Got it and the price just "bing-bonging" around that range till at the close it just shot up back to 84 cents. Down 1 cent from yesterday close. With commission and so on....wasted the S$3+K and not counting the mistake about Alibaba shares ( another
S$700 ) for a total of nearly S$4K. Silly or not???
Ok....about Alibaba shares, after I scanned the chart at T3B I realised that this stock was on the down trend for awhile in fact....for about 6 mths now. So, it was a bad call and I decided to get rid of it asap but with at present price....may have to hold till "BT".
Frankly....I was in zombie mode due to the lack of sleep! Realised that in order to be a successful trader....one must have a good sleep and in relax mood.
eyes closed....but brain still "up and running".
Woke up at 8.30am and got ready for the market opening. Normally after checking the status of the US markets closing then checked the morning market status for the region. After that, I would log-in and adjusted my contingent stop-loss orders. Since market was "up" everywhere....adjusted the price for stop-loss for all my outstanding shares on hand. For SMIC....I set it at HK$0.80 from HK$0.76, since the share price has gone up to HK$0.85...and when market "open" it was trading around 85/86 cents range. For the rest....I actually lower them.
Yes...today I did a couple silly trading mistakes. First, was that I took my eyes off my Alibaba counter and the stock dropped from HK$17.10 to HK$16.60 causing me to carry a unrealised loss of HK$3,000, the other one was even worst. After the lunch break, my pc "hanged" at the start so I logged off then re-start it. By the time, it was operating I saw that the share price for SMIC has started to drop from 84 to 82 cents....but before I can get into the system to adjust my stop-loss price it triggered the 1st lot at 80 cents for 280 lots...I managed to adjust the 2nd lot of 280 lots from 79 to back to 76 cents. SHIT....immediately saw a realised loss of
S$2.5K on my MFG platform thingy and I was like "blink, blink away" at the screen. Then....the price started to recover to 82/83 cents range. I just went in for 220 lots at 82 cents to make up for my share target of half mil ( 500 lots ). Got it and the price just "bing-bonging" around that range till at the close it just shot up back to 84 cents. Down 1 cent from yesterday close. With commission and so on....wasted the S$3+K and not counting the mistake about Alibaba shares ( another
S$700 ) for a total of nearly S$4K. Silly or not???
Ok....about Alibaba shares, after I scanned the chart at T3B I realised that this stock was on the down trend for awhile in fact....for about 6 mths now. So, it was a bad call and I decided to get rid of it asap but with at present price....may have to hold till "BT".
Frankly....I was in zombie mode due to the lack of sleep! Realised that in order to be a successful trader....one must have a good sleep and in relax mood.
Thursday, March 18, 2010
The Joke was on me
Yes....when I went down to the car park after my half day work at 1.30am last night, the car refused to start. Didn't even make any sound....flat battery. This was my fear from the start when I saw the car at the workshop. The workshop guy assured me that it is okay....no problem!
Lucky thing was that I had my "AA" card with me....normally never carry it with me. So called them for help...and after waiting for an hour, they came. Help to jump-start the engine....a 5-min job. Then tell me not to switch "on" the air-con for the engine to re-charge the battery. By the time I got home....at 3.30am as I go pumped some petrol for the car, I was sweating like a pig.
Had my bath....and checked the news at CNBC, the US market was "up"...so went to sleep.
Lucky thing was that I had my "AA" card with me....normally never carry it with me. So called them for help...and after waiting for an hour, they came. Help to jump-start the engine....a 5-min job. Then tell me not to switch "on" the air-con for the engine to re-charge the battery. By the time I got home....at 3.30am as I go pumped some petrol for the car, I was sweating like a pig.
Had my bath....and checked the news at CNBC, the US market was "up"...so went to sleep.
Thursday : trading up-date
At start of trading...the market already show a downward bias for all the Asian markets including Jap, Korean, Taiwan too. But I noticed that SMIC was quite strong supported and trading in a very narrow range HK$0.79/0.80 with more volume than normal. Btw I was thinking of selling at 80 cts so that I can go and sleep as at 80 cts the sellers were equally strong. Then at around 11am....I was feeling bored as my holding ( SMIC, Global Bio-Chem, Golden Agri and Alibaba ) was showing a negative of $700+, I get ready to go feed the fishes. At that point....this SMIC started to show volume and also start to move up. So...fast the volume hit 150 millions and the price went up to HK$0.83 then stayed there trading at 82/83 cts range.
Didn't go feed the fishes as it was raining at that time too....so went to prepare my lunch. Came to see the pc at around 12+ and the volume was at about 200 millions and the price was at around 82/84 cts range with strong buying support and lesser sellers too. Closed at mid-day at that range with 250 millions shares traded. For my other stocks....all down but the losses were easiy covered by the gain of SMIC.
At 3.30pm woke up to pee and at the same time...go look see look see the pc. SMIC was trading up to 84/86 cts range and huge volume too. But at the same time, Global Bio-Chem was weakening to below the HK$2.00 level. So I went in at HK$1.98 and 1.99 to buy another 80 lots....now my holding for this stock is at 180 lots. Ave price at
HK$2.02 now.
For Alibaba and Golden Agri - I just leave them be. I was looking at Tencent at HK$155.00 and put in an order of 1000 shares. No luck there...didn't drop to that level yet.
All in - not a bad bet for SMIC as it closed at HK$0.85, a gain of 6 cts for today.
And since my cost is just around HK$0.773 ( unrealised profit of HK$23.1K ) was higher when it was at 86 cts hehe. Well I am still confident that it will go higher in the coming sessions. Why???? Well....read my posting at T3B forum about the TSMC stake in the company and how the "chip-stocks" recovery stories!
Didn't go feed the fishes as it was raining at that time too....so went to prepare my lunch. Came to see the pc at around 12+ and the volume was at about 200 millions and the price was at around 82/84 cts range with strong buying support and lesser sellers too. Closed at mid-day at that range with 250 millions shares traded. For my other stocks....all down but the losses were easiy covered by the gain of SMIC.
At 3.30pm woke up to pee and at the same time...go look see look see the pc. SMIC was trading up to 84/86 cts range and huge volume too. But at the same time, Global Bio-Chem was weakening to below the HK$2.00 level. So I went in at HK$1.98 and 1.99 to buy another 80 lots....now my holding for this stock is at 180 lots. Ave price at
HK$2.02 now.
For Alibaba and Golden Agri - I just leave them be. I was looking at Tencent at HK$155.00 and put in an order of 1000 shares. No luck there...didn't drop to that level yet.
All in - not a bad bet for SMIC as it closed at HK$0.85, a gain of 6 cts for today.
And since my cost is just around HK$0.773 ( unrealised profit of HK$23.1K ) was higher when it was at 86 cts hehe. Well I am still confident that it will go higher in the coming sessions. Why???? Well....read my posting at T3B forum about the TSMC stake in the company and how the "chip-stocks" recovery stories!
Wednesday, March 17, 2010
Funny things
Yes...got a sms from my boss that I was given a promotion letter at AIA. I was like "What is going on?"....I was supposed to be sacked anytime type for not fulfilling the quota for the whole of last year. Btw I managed to stay in the biz by buying 4 policies for myself and family.
I don't want to ask or reply my boss....I shall wait till next week and go to office to see what's up hehe.
Yes...I have over 20yrs of service with AIA. Always managed to close my quota for the years. Did what I need to do...and hold back for another year. My motto is to out-last the boss and agency!
Didn't know that I out-last AIG itself....mine! That's POWER! it was a 100+ yrs co until it was "caught out" dealing with the credit swap thingy and now it is under the US gov!
I don't want to ask or reply my boss....I shall wait till next week and go to office to see what's up hehe.
Yes...I have over 20yrs of service with AIA. Always managed to close my quota for the years. Did what I need to do...and hold back for another year. My motto is to out-last the boss and agency!
Didn't know that I out-last AIG itself....mine! That's POWER! it was a 100+ yrs co until it was "caught out" dealing with the credit swap thingy and now it is under the US gov!
Wednesday - up-date
Stock trading - not good well esp for Monday. almost swiped off all the gains from last week....esp after kena "stopped out" for Zijin Mining. So power....the moment I went to get my breakfast ready, the price dropped until I was stopped out and rebounded back slightly. 50 Lots....and my stop loss at 8.5% from my buying price for the lot. On Tuesday....down and up again, frankly my shares were going no where and luckily end slightly on the plus side. Bought 300 shares of Tencent when it dropped on the morning and it closed with a HK$600 gain for me. The rest of my holding....also show minor gain. On Wednesday....market just gap-up esp for Zijin mining and Tencent....beautifully then after 1 hr of trading cool-down. Saw Alibaba dropping 7% after reporting a in-line result....so bought 5 lots at HK$17.06 then it just dropped further down to HK$16.90. I key-in again to buy at HK$16.88 but didn't get it. The price recovered back to HK$17.20 to 17.30 range. I also key in to buy SMIC at HK$0.78 for 100 lots. That was about 11.15am so I went down to feed the fishes. By the time I got home again...at 12.05pm, I noticed that my 300 shares of Tencent was "stopped out" at HK$162.00...."swee swee" and it bounced back after that. I also kena bought in for SMIC and the price was dropping too. Again key-in to buy at HK$0.76....also kena and it went as low as 75cts...shit! right before my eyes!
At that time....my portfolio was showing a minus of over 1.5K, I was like "WTF" lei.
So after 12:30pm, I went to sleep. Luckily when I slept up at 3.45pm, the HK market went up further and SMIC has recovered back to HK$0.79. BTW I had 300 lots at ave of HK$0.78. My 100 lots of Global Bio-Chem also show a small gain closing at HK$2.04
( my ave cost is HK$2.046 ). Alibaba also closed at HK$17.24 for a small gain for me.
I have confident for SMIC as the chip stocks are showing gains in US, Korean and Jap market according to the CNBC reports. In fact...I also "Q" at HK$0.75 but didn't get any at that price. I aim to vest up to 500 lots....or more. Yeah....agreed it is a risky move to over-position my portfolio on one or two counters. I have thought about how to recover the 40+% loss but cannot come up with a good idea unless I "focus" on a couple of right stocks and go almost all out on them.
Forex - didn't do much this week.
4D - same thing....fat zero!
Got a replacement car just now....and I drove it to work. MAN!!! it is older than my daughter hehe and the oldest car that I ever drove till now. POWER....a Toyota Corona 2 lit. Frankly it is fun to drive....as it drives liked the SMRT no 852 bone-shaking bus hehe. The 1st time, I started the car...I was like "POWER" as silent one but the "hazard light" was on. So when the mechanic came to check with me, I asked him about the "hazard light"....then he told me why I didn't start the engine. I was like...WHAT??? there was sound coming for the car...he then told me that was from the fan. He then show me how to start the car....WAH LAU! and it fired up sounding like a SMRT bus. Btw it also drank the petrol...noticed it was showing 1/4 tank but by the time I got to my office it was near empty. OMG!!! that was from Sin Ming to AMK Ave 5 and it shows about 12 kms as I went to Sing Siong to buy bread to feed the fishes.
At that time....my portfolio was showing a minus of over 1.5K, I was like "WTF" lei.
So after 12:30pm, I went to sleep. Luckily when I slept up at 3.45pm, the HK market went up further and SMIC has recovered back to HK$0.79. BTW I had 300 lots at ave of HK$0.78. My 100 lots of Global Bio-Chem also show a small gain closing at HK$2.04
( my ave cost is HK$2.046 ). Alibaba also closed at HK$17.24 for a small gain for me.
I have confident for SMIC as the chip stocks are showing gains in US, Korean and Jap market according to the CNBC reports. In fact...I also "Q" at HK$0.75 but didn't get any at that price. I aim to vest up to 500 lots....or more. Yeah....agreed it is a risky move to over-position my portfolio on one or two counters. I have thought about how to recover the 40+% loss but cannot come up with a good idea unless I "focus" on a couple of right stocks and go almost all out on them.
Forex - didn't do much this week.
4D - same thing....fat zero!
Got a replacement car just now....and I drove it to work. MAN!!! it is older than my daughter hehe and the oldest car that I ever drove till now. POWER....a Toyota Corona 2 lit. Frankly it is fun to drive....as it drives liked the SMRT no 852 bone-shaking bus hehe. The 1st time, I started the car...I was like "POWER" as silent one but the "hazard light" was on. So when the mechanic came to check with me, I asked him about the "hazard light"....then he told me why I didn't start the engine. I was like...WHAT??? there was sound coming for the car...he then told me that was from the fan. He then show me how to start the car....WAH LAU! and it fired up sounding like a SMRT bus. Btw it also drank the petrol...noticed it was showing 1/4 tank but by the time I got to my office it was near empty. OMG!!! that was from Sin Ming to AMK Ave 5 and it shows about 12 kms as I went to Sing Siong to buy bread to feed the fishes.
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