Momentum 12-1
Academic momentum, not technical analysis. A time-tested factor used as a timing filter on top of quality selection.
12-month cumulative return, excluding the most recent month.
Why exclude the last month?
Jegadeesh and Titman (1993) showed that stocks exhibit short-term reversal over the most recent month—winners pause, losers bounce. Including that window in a momentum signal contaminates the strategy with mean-reversion noise. The "12-1" construction is the academic standard.
Why combine with quality?
Asness, Frazzini and Moskowitz (2013) demonstrated that quality and momentum are negatively correlated at the factor level (correlation ≈ −0.45). When quality underperforms, momentum often does well, and vice versa. Combining them produces a portfolio whose drawdowns are dampened.
Practically, momentum solves the "dead money" problem of pure quality strategies: a stock can be cheap and fundamentally strong yet drift sideways for years. The momentum filter avoids buying quality stocks that the market is actively rejecting.
Implementation in this strategy
- Compute Momt for every quality-eligible stock on every rebalance date.
- Drop stocks with negative momentum (clear downtrend).
- Keep only stocks with momentum above the cross-sectional median (relative strength).
- Apply quality weights to the remaining set.
Common misconception
This is not chasing the latest hot stocks. It's a slow-moving filter that excludes clearly broken names from the quality candidate set. Turnover is moderate (monthly), and the average holding period is several months.