Past Performance Might Be Indicative of Future Results

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Like many people, I’m intrigued by stocks that have a good multi-day run up. I spend a fair amount of time trying to figure out what makes them tick. And while getting in at the start of a run may or may not be predictable in some way, are there other ways to make money off these “momentum bursts”?

One thing I started wondering is if certain stocks are more “prone” to these bursts. It certainly seemed like I came across the same names quite a lot. So I thought I’d go gather some data, which you might be interested in.

First of all I picked some parameters: the Russell 3000 would be my ‘universe’ of stocks to choose from, and I’d look at the period from 1/1/2010 through 05/08/15.

Then I defined the particular momentum burst I was looking for. I kept it simple: from the open of day 1 to the close of day 3, the stock must have jumped at least 15%. And so I don’t end up with overlapping, duplicate signals, I insist that the condition isn’t true on either side of this jump (although the stock is free to jump up or down before or after, just not up 15% in an overlapping three day period).

Then I had my trusty stock robot (aka AmiBroker) find all the appearances of this pattern. It then counted how many times the pattern appeared in the previous 60 bars, and how many times the pattern appears in the following 20 bars. This was done in such away to avoid any “future leaks”.

Basically, I’m trying to determine if a stock that is prone to┬ámomentum bursts in the past is more likely to have a burst in the next month. Here are my results:

Screen Shot 2015-05-11 at 4.30.50 PMThe X axis shows all the signals, sorted by the number of momentum bursts (as defined above) in the past sixty bars. This includes the bar that was used as the signal. As you might imagine, there are many more instances of a stock having the momentum burst without anything preceding it, than there are stocks with six bursts of 15% in sixty bars. In fact, in this 5+ year period, only 15 stocks had six bursts. However the data becomes meaningful for five bursts and below. There were almost a hundred samples for stocks with five bursts, and about 275 for four bursts in that sixty trading-day period.

And the results: if you have a stock that has its first or second burst in the past sixty bars, there’s a less than even chance of it happening again in the next twenty bars. However when you get up to three bursts, things start to get interesting. And four or five bursts show a definite likelihood for the stock to “pop” another time soon.

Interesting, don’t you think?

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