Our quarterly momentum screen is simple. Every three months, it takes long positions in the 10 FTSE 100 stocks whose share prices climbed the most in the preceding three months, and ‘shorts’ the 10 weakest performers.
Like every quantitative stockpicking strategy we follow in these pages, it is a theoretical exercise. For one, we don’t advocate short selling, no matter how liquid the stock. Not only are the downsides unlimited, but for retail investors, betting on a share’s price decline usually requires borrowing on margin or the use of leverage.
Nor, absent a genuine catalyst, are we too keen on three-month holding periods. Just because traders routinely think in days, weeks or months doesn’t mean the rest of us should. Constantly moving in and out of stocks always ends in higher fees, and often ends in tears, too. There’s also lots of evidence to suggest that, over shorter durations, the direction of equity markets becomes less predictable.