The Aleph Blog » Blog Archive » Mean Reverting Momentum, or, a Dead Cat Bounce?

Mean Reverting Momentum, or, a Dead Cat Bounce?

There have been debates between those who argue for momentum and mean-reversion.  I say, “Why Choose? You can benefit from both.”  Stock performance tends to persist after 12 months of outperformance, and tends to mean-revert after 48 months of underperformance.  Tonight’s screen reveals 33 stocks that were in the bottom quartile over the last 4 years, but in the top quartile over the last year, with market capitalization over $100 million.

A few of the larger stocks I look at here like Citigroup and AIG make me sick, but that is a part of the exercise.  If you don’t  get a “gag reflex” from some stocks as a value investor, you may not be taking enough risk.  I am certainly not a fan of the financial guarantors, but they are here.  They survived, at least for now.

I would would consider the following stocks to be a “disbelief” portfolio.  High risk, high opportunity.  There are few people that wake up in the morning and say, “This is the portfolio that I want to own.”

Mean Reverting Momentum

Too many financials.  Too many overlevered, dodgy companies.  But maybe they will do well over the next month.  The probabilities favor it, but I will try to measure it over the next month.  Portfolios that outperform rarely look normal.

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One Response to Mean Reverting Momentum, or, a Dead Cat Bounce?

  1. says:

    2 more positives, a number of these (C for example) are jsut under 5.00 and /or are just starting back with a dividend. $5.00+ and dividend will open the door for a number of funds to add these. More buy activity suggest higher price…

    Had not thought of ZLC in this light, but…

    (full disclosure – I work for C).


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.

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