Fundamental Information in Technical Trading Strategies

21 Pages Posted: 12 Sep 2008 Last revised: 25 Jan 2014

See all articles by Ute Bonenkamp

Ute Bonenkamp

University of Cologne - Department of Accounting

Carsten Homburg

University of Cologne

Alexander Kempf

University of Cologne - Department of Finance & Centre for Financial Research (CFR)

Multiple version iconThere are 2 versions of this paper

Date Written: February 11, 2009

Abstract

Technical trading strategies assume that past changes in prices help predict future changes. This makes sense if the past price trend reflects fundamental information that has not yet been fully incorporated in the current price. However, if the past price trend only reflects temporary pricing pressures, the technical trading strategy is doomed to fail. We demonstrate that this failure can be avoided by using financial statements as additional sources of information.

We implement a trading strategy that invests in stocks with high past returns and high operating cash flows. This combination strategy yields a 3-factor alpha of 15% per year, which is much higher than that of the pure momentum strategy that invests in stocks with high past returns without considering operating cash flows. The combination strategy outperforms the momentum strategy in almost all years. The outperformance can be traced back to a higher probability of picking outperforming stocks. These are stocks that yield high future cash flows and hardly ever delist due to poor performance. The combination strategy is easily implemented: the information used is publicly available, the stocks chosen are liquid, and even high transaction costs do not erode the outperformance.

Keywords: Momentum effect, trading strategy, technical trading, fundamental analysis

JEL Classification: G11, G12, G14

Suggested Citation

Bonenkamp, Ute and Homburg, Carsten and Kempf, Alexander, Fundamental Information in Technical Trading Strategies (February 11, 2009). Available at SSRN: https://ssrn.com/abstract=1267190 or http://dx.doi.org/10.2139/ssrn.1267190

Ute Bonenkamp (Contact Author)

University of Cologne - Department of Accounting ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany
0049(0)2214704214 (Phone)
0049(0)2214705012 (Fax)

HOME PAGE: http://www.controlling.uni-koeln.de

Carsten Homburg

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Alexander Kempf

University of Cologne - Department of Finance & Centre for Financial Research (CFR) ( email )

Cologne, 50923
Germany
+49 221 470 2714 (Phone)
+49 221 470 3992 (Fax)

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