London markets have enjoyed a rocky but undeniable mini bull run since early June, with the FTSE 100 now a good 600 points ahead of where it was five months ago. While many investors are understandably wary of reading too much into short term market movements like these, it's still worth tracking which companies and sectors have been benefitting from the advance.
Tracking individual companies that are displaying strong relative price strength in the market and perhaps even trading at (or close to) their 52 week highs has been shown to be a useful buy or sell indicator. The momentum concept was originally observed in a 1993 paper by Jegadeesh and Titman, and you can read more about the phenomenon here. In recent weeks we have looked at various shares that are enjoying strong price strength, including housebuilders, oil companies and bargain Piotroski stocks and why they could still have further to run.
Sector momentum rocks
While it's worth monitoring which stocks that are racing ahead of the pack, a powerful twist on the concept of momentum (and arguably an even more successful trading strategy) is to look at which sectors are leading the momentum charge. This was the focus of an influential 1999 study by Moskowitz and Grinblatt, which found that industry momentum investment strategies, which buy stocks from past winning industries and sell stocks from past losing industries, can be highly profitable. Moreover, they found that industry momentum almost always subsumes individual stock momentum – meaning that once you control for industry momentum, regular stock momentum is much less important.
It was a similar story in a 2011 study by Hong, Jordan and Liu, which found that a trading strategy using the 52-week high effect (where stocks at or near their 1-year price highs often go on to trade higher) was considerably enhanced by focusing on sectors rather than individual stocks.
So how can investors use these findings in practice? At Stockopedia we track the 52 week high screen and among the most interesting patterns that emerges from the 50-strong universe of companies are the hot sectors on the move. Not only does this screen give you a feel for the industries that are in favour among investors but the stock breakdown reveals the types of companies that are leading the pack…