Momentum investing (buying when an asset’s price is going up and selling when it is going down) has been a BIG THING over the last two years in equities, particularly in the US, but it has been around for many years as the basic ploy of FX and commodity traders and probably since trading was invented in Mesopotamia in 3000 BC. Of course, there is a lot more to trading than that but Figure 7 (plotting Dow Jones Industrial Average data) must be somewhat disheartening to all those who have been patting themselves on the back for reading US equities so well. It also takes away some of boldness out of all those arguing that stocks will go up again in 2018.
It does not seem to matter what happened this year (the DJIA is up over 20%, by the way) the answer to the question ‘what will US stock prices do in 2018?’ is ‘they will probably go up’. Then again, there is a one in three probability that they might fall. Moreover, it is not easy to say how much they might go up or down. In other words, momentum investing works when it works and not when it doesn’t. Simple, really! More FANGS anyone?