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No. of Recommendations: 6
Author: eugene4059 | Date: 3/13/05 11:03 AM | Number: 5243
Momentum is everything. It's what drives stock prices higher and higher and allows for gains of 100%, 200%, 300%+. Former owners of TASR, GOOG, CME, TZOO, NGPS, DCAI, and HRT, to name a few, would have something to say about how momentum affected their price movements.

The effect of momentum has been studied carefully for years by numerous respected economists. I highly recommend that you read Burton Malkiel's 'A Random Walk Down Wall Street'. Here is some of what he writes:

"Chartists believe momentum exists in the market. Supposedly, stocks that have been rising will continue to do so, and those that begin falling will go on sinking. Investors should, therefore, buy stocks that start rising and continue to hold their strong stocks. Should the stock begin to fall, or 'act poorly', investors are advised to sell."

and continuing:

"These technical rules have been tested exhaustively by using stock data on both major exchanges going back as far as the beginning of the 20th century. The results reveal that past movements in stock prices cannot be used reliably to foretell future movements. The stock market has little, if any, memory. The central proposition of charting is false."

and his conclusion:

"It turns out that the correlation of past price movements with present and future price movements is slightly positive but very close to zero". "Although there is some short term momentum in the stock market, ... any investor who pays transaction costs cannot benefit from it."

Every reputable economist, including Fama & French, William Bernstein, Jeremy Siegel, and Robert Shiller, who has ever really studied this has come to this same basic conclusion. There is not enough momentum in the market to base any strategy upon.

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