Price essential element is a popul...

Price essential element is a popular notion, as we have discovered since the publication of "Back to the Future: Price moment Models and How They Beat the Canadian Equity Markets (Foerster Prihar and Schmitz), in the Winter 1994/95 issue of Canadian Investment Review (CIR). In that article, we showed in what way (given our sample of TSE 100 stocks) investors could have used a price moment model to earn average annual responds in excess of 30% through the whole extent of the 15-year period from 1978 to 1992

This article refer to a framework for building price essential element models with popular spreadsheet software.

MOMENTUM AS A STOCK-PICKING STRATEGY

Price moment or "relative strength" models are based forward the premise that stocks that performed well (or poorly) in the novel past will continue to perform well (or poorly) in the near subsequent time 'Momentum" implies that stocks nurse to ride waves of optimism, or pessimism. A price essential element model attempts to identify those stocks that are beginning to ride a wave of optimism.

SPECIFICATION OF impetus MODELS

Momentum patterns are defined by the following six variables:

1 Selection Universe

As shown in Figure 1 the selection universe consists of all the stocks the impetus investor wishes to follow. (Figure 1 omitted.) The size of the selection universe is directly related to the amount of time and effort required to track and implement the impetus strategy. We specify the TSE as our equity market universe and we use the TSE 100 as our selection universe, although. the TSE 35 and the TSE 300 are alternatives.

2 impetus Portfolio Size

The momentum portfolio is a subset of the selection universe and comprises those stocks showing the greatest impetus in the selection universe. Investors must tradeoff potential performance (choosing and nothing else the best) with portfolio diversification (choosing many stocks). We specify the size of our essential element portfolio as 10 stocks.

3 Formation Period

As shown in Figure 2 the formation period is the time immediately prior to actual portfolio construction (time "0") in which a stock's moment factor is determined (from time "-u" to time "0") (Figure 2 omitted.) The shorter the formation period, the more the standard depends on recent performance--but the more susceptible it is to "random" fluctuations in responds If the formation period is too prolonged the identified trend might not continue. We attempt to strike a balance on examining momentum over the chiefly recent four quarters.

4. Holding Period

The holding period is the fixed time that the constituent portfolio is held after it is arrangeed (from time "0" to "+v") Investors must trade-off gros performance and transaction preciousnesss with shorter holding periods. In our standard we hold the momentum portfolio for common quarter. Once this quarter is done, we re-run the moment model and determine a novel set of 10 momentum stocks.

5 Weighting government for the Momentum Portfolio Stocks

A weighting behavior for the stocks within the essential element portfolio must be specified. The simplest command and the rule we use, is equal dollar-value weighting of each stock. That means at the start of each quarter, the dollar value of all 10 impetus stocks should be the same. Note that equal weighting necessitates that investors rebalance the stocks in their moment portfolio every quarter.

6. Weighting dominion for the Momentum Factor

Finally, a dominion must be defined to determine each stock's essential element factor. "We believe that a stock's chiefly recent retwms are more reflective of its moment Therefore, our momentum factor for each stock is equal to the weighted average recur of the previous four quarters, with the mostly recent quarter weighted twice as heavily as the prior three quarters. In notational form, our moment factor for stock is:

Momentum Factor =

04(R sub i,t-1 ) + 02(R sub i,t-2 ) + 02(R sub i,t-3 ) + 02(R sub i,t-4 )

where R sub i,t-k is the recur (or price change) for stock i during the quarter t-k (eg t-1 is the last quarter, t-2 is the quarter before last, etc)

IMPLEMENTING THE STRATEGY forward YOUR HOME COMPUTER

Momentum gauges are simple enough that they can easily be implemented using a spreadsheet package like as Lotus 1-2-3 or be eminent The most time-consuming process is getting started: that is, obtaining historical stock prices for each stock in the selection universe through the whole extent of the chosen formation period (eg for each of the last four quarters). Nevertheless, these data are readily available at principally major libraries in The TSE Review--a publication that lists the generally received TSE 100 Index stocks and their closing prices as of each month-end.

With these data inputted in a spreadsheet, it is a simple matter to calculate the essential element factor for each stock and obtain a list of the top moment stocks. The following is an example using the TSE 100 stocks.

(a) place up six columns so that you can record company names followed by the five prices (current and quarters ending three month six month nine month and 12 month ago) for each of the 100 stocks.

(b) settle up four columns with a spreadsheet formula to calculate answers for each of the past four quarters. Formula: