I've been reading up on a number of academic studies regarding momentum investing.  The general consensus seems to be that contrary investing (buying losers) works better on a short time scale (up to a month), while momentum strategies work well at more mid-term time scales.  Of course, there are a lot of definitions of "momentum", and each of these researchers must define one for their studies.  In my experience, the street version of "momentum" generally refers to short-term strategies, with a buy-sell period that might even be measured in minutes, as opposed to mid-term strategies (e.g. if the stock has gone up for 12 months, buy it and hold it for another 6 months).  In that sense, these academics are somewhat out of touch with the ordinary investor.

For every academic investment thesis out there, you'll find someone who has attempted to disprove the thesis.  There are even those who question the January effect.  It's interesting to note, however, that in the momentum studies mentioned above, a common practice is to disregard January data since the presence of January data mars an otherwise significant tendency for mid-term winners to continue to win over the next few months.  Other researchers will create two tables to display their data...one that includes January results, another without. 

You won't find a lot of these sorts of mid-term momentum strategies in our monthly or quarterly tables (e.g. for a good first quarter gain, buy stocks that have prospered over the last 3 months...a hypothetical example).  That's not to say these strategies don't work.  Rather, we've identified numerous better strategies that knock most of the mid-term momentum strategies off the tables.

Other momentum studies focus on "industry momentum"...buy stocks in a winning industry group.  On a mid-term basis, this has been shown to be a particularly strong momentum strategy.  

Our own experiments tend to confirm this concept of industry momentum, though the results aren't mind-blowingly significant (and thus we don't summarize them in tables).  One odd result...industries that fared well 3 trading sessions ago tend to do well in the next session.  Given the level of significance, the result is a tad "fluky", but then again, one could surmise that the 3 day lag is somehow related to the ways in which short term and long term memories get filed away, and the ways in which short term memories become long-term memories.

In any case, as a general rule it does seem to make sense to buy stocks whose industry groups are moving upwards.

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We've been toying with some of our daily data.  The question we're asking is, "if group X is today's strongest group, what group is likely to be tomorrow's strongest group?"  After crunching the data, we came up with some interesting results.

We've never been fans of naive "momentum" strategies.  The data just doesn't show that simply buying stocks that are going up tends to produce benefits.  What we're finding though, is buying the right group that is going up could definitely be of benefit.  If cheaply-priced stocks prospered yesterday, they're likely to do so again today.  If stocks with low standard deviation prospered, they're likely to do so again.

If you're an experienced momentum guy and are reading this, you're probably saying "duh", but it's nice to see this sort of thing validated by the data.

On the other hand, some of these strategies have a momentum "twist".  For example, if today's best gaining group was yesterday's big losers, there's a tendency for the behavior to repeat...today's big losers have a decent chance of being tomorrow's big gainers.   But to take advantage of this sort of momentum, you've got to dump today's winners.  You might say it's the strategy that has momentum, not the stocks (which, in this case, lost money in the last trading session).

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