Directional Momentum Strategies With No-load Mutual Funds

Abstract

A typical textbook definition of the weak form efficient market hypothesis suggests that past security price changes do not predict future price changes.  But a large body of empirical evidence claims that over horizons of three months to a year stock prices exhibit momentum, that is, continuation in a price direction.  This pattern of stock price momentum is exploited by some mutual funds that typically buy past stock winners and sell past stock losers.  In this paper, we show that if momentum is modified to take into consideration price patterns within the period of selection/formation, the directional momentum strategy applied to stock and/or bond no-load mutual funds proves very profitable for long term (fifteen to twenty years) investors.