Where Has the Trend Gone? An Update on Momentum Returns in the U.S. Stock Market

Journal of Wealth Management, 20(2), 29-40 (2017).


Posted: 20 May 2019

Date Written: July 22, 2016


Prior studies find broad-based support for the efficacy of trading strategies based on momentum in stock returns. More recent studies, however, note a declining benefit relative to that identified in seminal studies on momentum. These recent studies, however, primarily examine time periods ending prior to or immediately following the 2008 financial crisis. Thus, we extend this line of research by exploring the profitability of momentum trading in the U.S. equity markets over the broader 1986 to 2015 time period. Our results for the earlier part of our sample period (i.e., 1986 to 2006) fall in line with previous studies, as we find a monotonic relationship between decile portfolios formed based on prior six month performance and their subsequent twelve month holding period excess returns. In contrast, when we evaluate more recent periods (i.e., 2007-2015 and 2010-2015), we find dramatically different results. In particular, alphas for the “winner” portfolio, which have historically been the highest, are actually negative during both sub-periods. Furthermore, the curvature of the recent portfolio return distribution is clearly no longer monotonic. Rather, it follows a more inverted U-shaped curve from the “winner” portfolio (P1) to the “loser” (P10) portfolio, with excess returns cresting around the fifth decile portfolio (P5). In fact, we find that the risk adjusted returns of the “winner” portfolio (P1) are significantly less than the middle portfolio (P5) for both recent sub-periods. These results suggest that individual and institutional investors seeking to profit from traditionally-based momentum trading strategies may need to rethink their approaches.

Keywords: Momentum trading, Portfolio management, Investor behavior, Market efficiency

JEL Classification: G02, G10, G14

Suggested Citation

Dolvin, Steven D. and Foltice, Bryan, Where Has the Trend Gone? An Update on Momentum Returns in the U.S. Stock Market (July 22, 2016). Journal of Wealth Management, 20(2), 29-40 (2017).. Available at SSRN: https://ssrn.com/abstract=2813333 or http://dx.doi.org/10.2139/ssrn.2813333

Steven D. Dolvin

Butler University ( email )

4600 Sunset Avenue
Indianapolis, IN 46208
United States

Bryan Foltice (Contact Author)

Butler University ( email )

Indianapolis, IN 46208
United States

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