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What would happen if you decided that you know the market's down this year, but I know some of the best-performing stocks are up? Should I just buy them for the next 12 months? Well, let's test that hypothesis.
What if you chase momentum and pick the top eight stocks from the start of January to the beginning of May in 2021. So last year. Then in the following 12 months, i.e., May 2021 to 2022. Well, you'd have had a 38% return. And that's the data and the numbers to prove it.
So you picked 2021, January to May, as the biggest stocks to hold for the rest of the year. Okay? You got a 38% return. What if that was a fluke? That year, last year was just a fluke because, you know, for whatever reason.
Let's pick 2018, which wasn't a particularly good year for the market. Again, over a 12-month period, you'd have a 38% return again, coincidentally. So if you picked the top eight stocks in May 2018, the top eight from January to May 2018, in May 2018 - so you'd have the data then - then from May 2018 to 2019, you generated a massive 38% return.
So you might say, "Well, Alpesh, all right. Give me a bit more. This is interesting. Tell me more." So here's a bit more. What if you did pick the winners for this year? Did they have anything in common?
Well, did they have anything in common in 2019? Yes. They had a monthly price momentum. Beyond just being in the top eight by performance in the S&P 500, they did have monthly price momentums on the monthly chart. The MACD was just rising from an oversold position. You can see it there; the bottom half of the graph. Okay? That's the other thing they had in common. They might have had others, but that's the other thing they had in common.
So we want to look at that. What if you want to do that now? Which are the top eight from January to May so far this year? Well, I've listed them there. The names are over there, which are the top eight. So you'd be holding them from now, 2022, to 2023.
But you've still got to ask the question, "Wait a minute, which ones have monthly momentum rising?" Well, Occidental, Valero, Marathon Oil, Halliburton, Devon, and Marathon Petroleum all have momentum rising, but it's a bit high. So if I bought, it might continue high - a bit like the tech stocks. They got high momentum, but they just kept going.
Cortera and Mosaic are not overbought. They've got rising momentum but not overbought, so probably better. Now I don't know if that will give you another 38% return from now to the next 12 months because, as you can tell, the data is somewhat limited, and it's a small sample size and a short period. So there are many reasons why mathematicians and statisticians will say, "What are you thinking? Don't do it."
What if you picked the worst performers? What if you did pick the losers?
Well, if you chased the bottom and picked the bottom ten stocks from the start of January to May 2021, and you picked them in May 2021, then in the following 12 months, from May 2021 to 2022, you'd have an 18% loss. So let's forget about picking bottom fishing and picking the dogs of the S&P 500.
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Alpesh Patel OBE