Stockcoach's Corner

Up 0.6 percent today. One of the things that I find amazing is how many people there are who are obsessed with the stock market but have never bothered to read any of the thousands of research papers about the stock market. It's like to trying to become a surgeon without every bothering to go to medicine school. Some might argue that the academic literature is irrelevant. But that's a rather strange judgement considering that those people who make it typically don't know the literature and so can't be in position to say one way or another. So let me bring things down to earth and ask a few questions that have been extensively probed in various academic papers. I think you will agree that regardless of whether you are technician or a fundamentalist like myself, knowing the answers to these questions can improve your trading performance.

Do stocks that have been winners over the past few months continue to outperform?

Do stocks that have been winners over the past 3 years continue to outperform?

If a stock outperforms the market but does so on low volume, it is more likely to keep going up than if it outperformed on high volume?

Do fund managers that invest in small cap growth stocks outperform the market? What about fund managers that invest in value stocks?

Do stocks with high short interest outperform the market?

Do stocks with falling institutional ownership outperform the market?

Is the reaction of the market to positive economic news (i.e. lower unemployment) different in bear markets than bull markets?

How much of the outperformance of small caps is subsumed by the value premium?

During which months do momentum stocks do best?

During which months do small cap stocks do best?

Are momentum effects more pronounced for small cap or large cap stocks?

How is consumer sentiment correlated with stock returns?

Do companies that have recently announced a secondary offering outperform?

Do companies with lots of insider selling underperform?

Do companies with strong analyst ratings outperform?

Do companies that have been recently upgraded by analysts outperform?

Do companies with a high dispersion of analyst earnings estimates outperform?

Do stocks that have recently hit a 52 week high outperform?

Do stocks that have recently experienced above average volume outperform?

Do stocks that have crossed upward through their 50 week moving average outperform?

Anyway, you get the picture. It took me less than 10 minutes to type those questions. I could easily type another 500. Do you know the answers? If not, you're not alone. Most Wall Street money managers don't know either. And I think if you knew the answers, many of them would surprise you. So perhaps you should spend a bit less time watching the price bounce around on a stock chart and do some research. A good place to start is CXO Advisory. They have produced executive summaries on many outstanding research papers. I also suggest you download some of these papers (most are available free of charge) and try to read them. It might be boring, but believe me it's worth it.