A study by a chartered financial analyst showed that if momentum has been going on for around five months, stock investors should be careful.
“What I did is I did a study where I looked at all stocks across Asia and tried to identify how many months of continuous momentum before it started to slow down,” Andrew Stotz told ANC’s “On The Money.”
Stotz studied around 7,500 stocks across Asian markets except Japan, and then looked for investible stocks with a market capitalization of at least $500 million, reducing the total number of stocks to 1,200.
Tracking performance from December 2003 to June 2014, Stotz discovered that only 56 percent of investible stocks in Asia rose 5 to 7 consecutive months at least once in the past 10 years.
Forty-six percent of the time, prices were going up, but 48 percent of the time, stocks dropped.
Only 21 percent of stocks continued to give positive return for a second month while only 10 percent gave positive returns for the third month straight.
Only 5 percent gave positive returns for four consecutive months.
Financial adviser Salve Duplito explained this means there have been more losing months than winning months in the past 10 years in Asian stock markets.
The study also showed that long-lasting momentum is rare, and only 10 percent of the time does momentum last for more than four months.
“What you end up with is, let’s say about 4 to 5 months, is the period of time when momentum is fresh. But after 4 to 5 months, momentum gets stale,” said Stotz.
Stotz warned that because stock prices are rising, newcomers are at risk of crashing because they don’t know how to sell.
“The Philippines has been going on such a great run, that anytime we get great runs in the market particularly when it really starts to go [up], that attracts newcomers into the market,” he said.
To prevent crashing in the stock market, Stotz advised investors to look at fundamentals, valuation, risk and momentum.
He also advised to avoid cheap stocks that never move, and to take advantage of opportunities to make money in the market.
“If you’re into momentum investing, you’re hardcore. This is an investment style that is high risk, and if you don’t do it well, you can lose a lot of money,” said Duplito.
“Investing styles are very personal strategies, finding your own style that works with your own quirks takes time. Be patient and don’t be afraid to try new ones,” she added.
source: www.abs-cbnnews.com
