Industry Momentum

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Many asset allocation strategies operate at the level of industry groups. Industry momentum -- buying past winners and selling past losers -- is present in U.S. data going back to the early 2000s.

In one of the most influential papers in empirical finance, Jegadeesh and Titman (1993) showed that past winning stocks outperform past losing stocks. Here, I analyze momentum at the industry level, by studying the performance of the 11 SPDR Sector Funds, as well as the Russell 2000 and S&P Midcap 400 indexes, going back to the early 2000s.

I analyze the returns of these 13 indexes over one-, three-, six-, 12-, and 24-month formation periods. For each horizon, I divide the industries into three groups: the top quintile winners (highest returns over the formation period); the top quintile losers (lowest returns); and the neutral sectors that do not fall into either category. Except for the one-month evaluation horizon, winner sectors outperformed loser sectors in all cases.

industry percent

The current state of play is shown in the above table, which is sorted by the 12-1 return column (this is the return of each sector over the past 12 months, excluding the most recent month — more on this below). The other columns show industry returns over different horizons, all measured in months. For example, the “1” column shows last month’s returns for all industries, and the “24” column shows the returns of all industries over the prior two years. If one were trading three-month momentum, the current top industry pick is Energy (biggest three-month winner) and the bottom pick is Real Estate (biggest three-month loser). If one were choosing based on the last 12-month returns (the “12” column), then the top choice is Communications and the bottom choice is Utilities.