Trendfollowing on Stocks

Apparently it works, and it works best on the most volatile stocks (whod a thunk it?)

The new paper : “A New Anomaly: The Cross Sectional Profitability of Technical Analysis” and the always great summary from CXO.

I have a few questions on the study, and a few quibbles (trendfollowing is hardly a new anomaly) but otherwise another nice paper that flies in the face of conventional wisdom for many.


In this paper, we document that an application of the moving averages (a popular form of technical analysis) to portfolios sorted by volatility generates investment timing portfolios that outperform the buy-and-hold strategy greatly, with returns that have negative or little risk exposures on the market factor and the Fama-French SML and HML factors. As a result, the abnormal returns, relative to the CAPM and the Fama-French three-factor models, are high, and higher than those from the momentum strategy for high decile portfolios. The abnormal returns remain high even after accounting for transaction costs. While the moving average is a trend following strategy as the momentum, its performance has little correlation with the momentum, and behaves differently over business cycles, default and liquidity risks.