Where Have All the Momentum Bursts Gone?

AMG-momentum-burst-Mar2000

Where have all the momentum bursts gone?

One of the systems I trade relies on catching short-term momentum bursts, usually lasting three to five days. It’s similar to Pradeep’s momentum-burst strategy (here), but since I don’t have his exact system, I’ve reverse-engineered it and come up with my own variations.

Without boring you on the specifics, I’m looking for stocks with long-term momentum, a medium-term history of previous bursts, and a pullback and low-volatility pullback from a recent major high. Ideally I catch the burst when it happens, and stay in the trade for just a few days.

The lead image gives an idea of what these look like.

Recently I started wondering where all the momentum bursts have gone. And then wondered if they had actually gone anywhere at all. Time to crunch the numbers!

For this, I needed delisted stocks as well as current stocks. So I’m using the entire US stock universe from 2000-2015, NYSE and NASDAQ, listed and delisted stocks.* Anything was a candidate that had a historical (i.e. not adjusted for splits etc) closing price > $2 and a 10-day median volume greater than 50,000 shares. All bursts that were > 5% from open to close were included in the data.

I first looked at the monthly momentum-burst totals dating back to 2000, to see if there were any anomalies:

Screen Shot 2015-07-15 at 8.17.35 PMNear the end of 2014, you’ll see there were a few months with no bursts, as well as January of this year, and July (so far). The previous periods that had zero bursts per month seem to coincide with major bear markets or corrections in the past. But February through June of 2015 look pretty normal. Not high, but close to the EBA (“eye ball average”). So that doesn’t really help.

Well how about the quarterly averages? Were Q1 and Q2 of 2015 abnormal in any way?

Screen Shot 2015-07-15 at 8.16.55 PM
Excludes 2015 data.

Q1-2015 had 12 bursts, and Q2-2015 had 14 bursts. A little below average but not crazy-low in my opinion. Hmm, what about averages per calendar month? Do some months show bursts more than others? Ok let’s dig in…

Screen Shot 2015-07-15 at 8.17.24 PM
Excludes 2015 data.

Ah hah! Perhaps there’s a seasonal component. July is, on average, the second-worst month for momentum bursts. That might explain why we haven’t seen any real breakouts this month (at least based on the specific parameters used in my scanning code). And March of this year was unusually high, with a total of 10 bursts. The rest of the months so far in 2015 were below average.

So what does this tell me? That yes, momentum bursts are on the low side, although there have been much worse periods in history. And also I shouldn’t expect too much of July in general. Perhaps I should not bother trading the system until August rolls around? We shall see!

 

*yes I did finally break down and pay for delisted stock data as well. No more survivorship bias for me!

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