Top-Momentum Portfolios

The Efficient Market Theory and Random Walk Theory are standard theories in investing. These theories are based on the assumption that markets can quickly and efficiently adjust to new information. Stock prices therefore reflect all information that’s available in the market. Thus, future prices move in a random manner and cannot be predicted.

Momentum, the fact that a trend tends to continue, is the most persistent deviation from these standard theories. It is a so-called Market Anomaly and extensive evidence of its existence can be found in literature. Literature about Factor Investing introduces factors, that can all be seen as Market anomalies. Besides Momentum, Value, Size and Low-volatility are the most important factors. But definitely Momentum is the strongest and most persistent Factor.

With our Single Momentum and Double Momentum Investment strategies, we trie to harvest the benefits of Momentum in the market as a whole. We do so by staying in or out of an Index Tracker (ETF) depending on the actual momentum of the Index.

In this section, we will move beyond ETF’s and construct portfolio’s of individual stocks with high momentum. As we did for SMI and DMI, for these Top Momentum Portfolio’s we will perform backtesting and evaluate returns, volatility and maximum drawdown.