January Has Been Tough on Price Momentum

January has been a tough month for price momentum. Past winners are underperforming past losers, which generally is atypical. I researched how one measure of price momentum, trailing 6 months returns excluding the most recent month, has worked monthly since 1972. This spreadsheet shows the results - January is the worst month of the year, with the best ranked stocks underperforming the worst by nearly 3%, with a few real lopsided months thrown in.

This month seems to be one of those particulary inverted months, with past winners lagging past losers by over 5% mtd. An article in Hedge Fund Daily confirms that other quants are experiencing these results . My guess is that investors are jumping into the stocks most beaten down from tax loss selling or window dressing, and driving their prices up, while stocks that had been doing relatively better are being neglected, or worse, sold off.

The problem is that many of those downtrodden stocks deserved to be beaten up - they were overvalued or their fundamentals were deteriorating. This short term pop doesn't tend to hold up over time, as the issues that caused them to lag previously come back to haunt them. Be careful chasing this month's winners, they are likely to fade.