A change (could be macro, sector, or company-specific) occurs at a company that triggers a feed-back loop between the stock price and the company fundamentals. Another way of looking at it is through the idea of “real options”. Certainly a company whose stock has gone up has a lot more “real options” than one that has declined. Now the management may ultimately use those options to destroy value, thus triggering a negative reflexivity cycle but in the interim, the equity value of a company with more “real options” should be worth more than a company with less.

Cheers.

James

There is a book by O’Shaughnessy (or something like that) called “What works on Wall Street.” In it, he creates a hybrid strategy based on several value ratios and relative strength over differ lengths of time. It had fantastic risk adjusted returns (and overall returns).