Is the ‘buying winners and selling losers’ trading strategy profitable in the New Economy?

Abstract

Using recent US financial market data, this study tested whether relative strength trading strategy was profitable in two different sample periods (1990 to 2012 and 1965 to 2012). In contrast to the previous findings, our study finds no clear evidence for profitable zero-cost buy and hold strategy for 3- to 12-month periods for the period 1990 to 2012. However, we find few profitable zero-cost strategy for the period 1965 to 2012, but the returns are much smaller than previously reported. These findings may imply gain in market efficiency in the US financial markets in recent period.

Keywords:

• relative strength strategy
• financial returns
• stock trading
• market efficiency

JEL Classification:

• G11
• G14

Notes

¹ Significant loss occurred in the US real estate sector, damaging financial institutions globally as well as in the United States.

² ‘Weak form’ of efficiency claims that excess returns cannot be earned by using investment strategies based on historical share prices; ‘semi strong form’ implies that share prices adjust to publically available information rapidly such that no excess returns can be earned by trading on that particular information (for detailed discussion see Fama, 1991).

³ Further, cross-sectional and time-series studies analysis may be required to formally test this conjecture, which is out of scope of this short article.