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Momentum and pricing : some evidence

Few managers can both stay away of short-selling and reassess themselves sharply when prices are excessively low, and above all no one can make it happen every time. In these volatile and shocked markets, timing is key but difficult to master.

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In these very troubled times (see below, the evolution of the Eurostoxx 50 index volatility for the last 3 years), some observers wonder why managers do not sell while "it showed that there had bad news "and other (fewer) wonder why managers do not buy when prices are ridiculously low.

The truth is not all of us know to do everything and also that good or bad decisions in the past clearly have implications on the ability to react in the future. This is the main difference between a manager already investing, with assets to manage, and the vision of an adviser such as an analyst or a broker.

Professionals such as J. Chahine has shown that the market had a natural "momentum" bias, ie a strong or even dominant tendency to overreact to good or bad news in the short term. This bias can be up to totally forget the pricing in times of market stress or euphoria: the tech bubble of the 2000s swelled with the number of "computer clicks" without generating more profits ... The market only holds the short term relative potential without regard to long-term intrinsic values. Conversely, from a certain level of excess, the assessment is, however, at minimum, a brake on the decline or even a supporting factor. It is the awareness of the economic fundamentals.

We are not traders, what we know and can do, is applying, certainly without excess but with consistency and rigor, our management processes that have proven themselves over time through long-term analysis that work in continuity.
Marc Renaud

Although this is perhaps for some of our readers a tautology, the truth is that we all try to correct the excesses associated with market bias, arriving there in only partially. Few managers can both stay away of short-selling and reassess themselves sharply when prices are excessively low, and above all no one can make it happen every time. In these volatile and shocked markets, timing is key but difficult to master. Momentum managers with flat position may not benefit from the rebound. Does this mean that it is imperative to get involved in the decline to be able to jump into the following uptrend? Often but not always. So accept the downside risk does not necessarily lead to try buying low.

We are not traders, what we know and can do, is applying, certainly without excess but with consistency and rigor, our management processes that have proven themselves over time through long-term analysis that work in continuity.

Marc Renaud , November 2011

Article also available in : English EN | français FR

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