01 Mar Learning From Dorsey Wright's "Relative Strength and Portfolio Management"
Relative strength strategies perform well over a 3 to 12 month formation (lookback) period.
In this article, Absolute Momentum will be used interchangeably with trend following or time series momentum. Relative Momentum will be used interchangeably with cross-sectional momentum or relative strength.
The paper describes the importance of proper testing procedures such as inclusion of Monte Carlo analysis.
Relative strength is an intermediate-term factor. Most research has found that relative strength is a viable strategy over a 3-to 12-month formation period. At shorter and longer formation periods there is significant mean reversion.
When portfolios are formed using a short lookback window (1 Month Lookback), or a very long lookback window (3 Year & 5 Year Lookbacks) the portfolios don’t perform as well because there is significant mean reversion at these intervals.
Research Paper: Relative Strength and Portfolio Management
Author: John Lewis, CMT
Company: Dorsey Wright Money Management