We might have heard the old saying, “The trend is your friend,” right? Well, that’s the heartbeat of momentum investing. It’s all about spotting which way the market’s moving and then just going with it. Whether stocks are climbing up or tumbling down, momentum investors are there to ride the wave and hopefully make some gains along the way.
In this blog, we’re diving into two classic momentum investing strategies: price momentum and 52-week high strategies, as discussed in the paper by Thomas J. George and Chuan-Yang Hwang titled “The 52-Week High and Momentum Investing.”. We’ll put them under the microscope with some solid backtesting, showing us whether they have been effective in the S&P 500 market from January 2001 to March 2024 (as of the publication time of this blog).
Note that the positive outcomes from backtesting these strategies over the past decades do not guarantee that these strategies will work in the future. In fact, we can view the historical data as just one possible realisation of a random path, and the past may not necessarily repeat itself. The main purpose of this backtest is to perform a sanity check on how the portfolio would have performed under specific conditions and assumptions. Hence, the results should not be taken as a call to action to invest based solely on the outcomes presented.
- In 2004, George and Hwang examined three momentum investment strategies (price momentum, industry momentum, and 52-week high momentum) using data from all stocks listed in the CRSP from 1963 to 2001.
- They discovered that the 52-week high momentum strategy yielded the highest returns, proving to be a strong predictor of future returns and a more reliable trading signal than price momentum.
- In our study, we backtested the effectiveness of the price momentum and 52-week high momentum strategies on the S&P 500 index from 2001 to March 2024, focusing solely on long-only strategies.
- This analysis will also include stocks that have been delisted during the past period to ensure our data does not suffer from survivorship bias.
- Our findings reveal that the price momentum strategy had the highest Compound Annual Growth Rate (CAGR) at 11.91%, outperforming the 52-week high momentum strategy, which had a CAGR of 10.36%. Both significantly surpassed the buy-and-hold strategy for the S&P 500, which had a CAGR of 8.17%.
- Our backtest results contradict the findings from George and Hwang in 2004, supporting the notion that positive outcomes from past backtests do not assure superior future performance.
Let’s dive into the world of classic momentum investing strategies, where George and Hwang (2004) have conducted thorough research. Their study covered all stocks listed on the CRSP from 1963 to 2001, focusing on three main strategies (Gray & Vogel, 2016):
- Price Momentum: Originating from Jegadeesh and Titman (1993), this approach evaluates the past performance of individual stocks. It involves buying stocks from the top 30% performers and selling from the bottom 30%.
- Industry Momentum: Advocated by Moskowitz and Grinblatt (1999), this method looks at past industry-wide returns, buying stocks in the top 30% performing industries and selling from the bottom 30%.
- 52-Week High Momentum: This strategy assesses how close a stock’s current price is to its 52-week high. Stocks near their 52-week high are bought, and those far from it are sold. The calculation involves dividing the stock’s price from one month ago by its previous month’s 52-week high over the past year.
George and Hwang’s findings highlight the 52-week high momentum strategy as the most profitable, offering strong future return predictions and outperforming price momentum in terms of trading signals. Gray and Vogel (2016) noted that incorporating the 52-week high in rebalancing every six months improves portfolio performance, though monthly rebalancing worsens results. However, they observed no solid proof that this strategy outperforms the relative strength price momentum strategies.
Addressing these findings, our study aims to evaluate the performance of price momentum and 52-week high momentum strategies specifically in the S&P 500 index from 2001 to March 2024, concentrating solely on long-only strategies.
In this study, we aim to examine how the price momentum and 52-week high momentum strategies perform when applied to the S&P 500 index from 2001 to March 2024.
To ensure our study is free from survivorship bias, we’ve meticulously collected data on all S&P 500 index constituents for each period under review, including stocks that were later delisted. This means that for any given day in 2001, for example, our analysis includes every stock that was part of the S&P 500 up to that day, excluding any stocks not yet listed, such as those added in 2015. This approach ensures they are not part of our backtesting universe for the year 2001.
Furthermore, we continue to consider delisted stocks in our dataset until they are no longer available on the market, aiming to accurately mimic the investable universe at any given time as closely as possible.
Below, we summarize our backtesting conditions in Table 1.
The results from our backtesting are presented in the tables and figures provided below.
According to the results, the price momentum strategy emerged as the top performer, achieving a Compound Annual Growth Rate (CAGR) of 11.91%, closely followed by the 52-week high momentum strategy with a CAGR of 10.36%. Both strategies notably surpassed the buy-and-hold strategy for the S&P 500, which had a CAGR of 8.17%.
Additionally, these strategies experienced smaller losses during maximum drawdowns and shorter drawdown periods compared to the S&P 500 index, indicating better performance in market downturns. This is further evidenced by their higher Sharpe ratios, suggesting more efficient risk-adjusted returns.
When examining yearly returns and the distribution of returns across all strategies, the price momentum strategy, on average, yielded higher returns. However, it also displayed greater volatility. Despite this, its Sharpe ratio remained the highest among the strategies analyzed, showcasing its superior return per unit of risk. Overall, the price momentum strategy outperformed the 52-week high momentum strategy in both returns and Sharpe ratio.
Our study challenges the conclusions drawn by George and Hwang, who favoured the 52-week high momentum strategy over price momentum. Various factors, such as the specific period analyzed, could influence these differing outcomes. Hence, adopting the 52-week high strategy immediately after the publication of their paper might not have yielded the most favourable results compared to utilizing the price momentum strategy.
This emphasizes the notion that past backtesting successes do not assure future performance excellence. While backtesting can serve as a preliminary check, our analysis confirms that both momentum strategies have outperformed the S&P 500 index over the past two decades, highlighting their potential despite the unpredictability of market trends.
Diving into momentum investing strategies on the S&P 500 from 2001 to March 2024 gave us some pretty interesting insights. We decided to look at both price momentum and 52-week high momentum strategies, making sure we didn’t miss out on any data by including even those stocks that got delisted.
What we found was a bit of a twist on what George and Hwang discovered back in 2004. While they were supporting the 52-week high momentum strategy, our tests showed that the price momentum strategy actually had the edge with a Compound Annual Growth Rate (CAGR) of 11.91%, beating the 52-week high momentum’s 10.36% CAGR. And yes, both outperform the S&P 500’s buy-and-hold strategy, which came in at an 8.17% CAGR.
Not only did the price momentum strategy lead the pack in returns, but it also showed us better numbers in terms of risk, i.e., lower drops and quicker recoveries. Also, it boasted a superior Sharpe ratio, suggesting we are getting more bang for your buck risk-wise.
Hence, despite what George and Hwang said, our lookback shows that the price momentum strategy might be the way to go during the last two decades. However, past success stories don’t always promise future wins. It’s a good reminder that backtesting is just one tool in the toolbox, not the whole kit and research tool.
George, T. J., & Hwang, C. (2004, October). The 52‐Week High and Momentum Investing. The Journal of Finance, 59(5), 2145–2176. https://doi.org/10.1111/j.1540-6261.2004.00695.x
Gray, W. R., & Vogel, J. R. (2016, October 3). Quantitative Momentum. John Wiley & Sons.
