Momentum, Schmomentum

My biggest insecurity when it comes to my investing comes from the concept of momentum.  For the past 7+ years, I’ve been leaning against the wind, buying companies with bad momentum, and for the most part, it worked.  In general, falling stocks have bounced back.  Over the last six months it has not seemed to work so well.  Now, I had a period that was much worse in the middle of 2002.  I even scraped excess money together to invest in late September of 2002.  I am less confident here.

I have a number of ideas that work with respect to momentum:

  • In the short run, momentum persists.
  • In the intermediate-term, momentum reverts.
  • Sharp moves tend to mean revert, slow moves tend to persist.

My own proprietary oscillator indicates that we are very close to a short-term bounce point.  The recent move down has been too rapid, and sellers should be tired.  One more hard down day, and a bounce should occur.

Back to my own portfolio management.  Since I am a value investor, I have leaned toward longer holding periods, which implies to me that I should be playing for the intermediate-term reversal of momentum phenomenon.  But the short-term momentum anomaly is probably stronger.  Consider these two pieces from Crossing Wall Street.  Eddy illustrates the point well.

So, as I head into my next portfolio reshaping, I am scratching my head, and wondering how I should use momentum in my investing.  Suggestions are welcome.