Momentum Trading in Sector ETFs
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If markets were efficient, then strategies based on past price behavior would be essentially worthless. However, many traders follow investment plans that are designed to exploit momentum, particularly across sectors. This article examines one common, related trading rule: “There’s Always a Bull Market Somewhere.” Under this approach, investors buy (sell) past 12-month winners (losers). Prior studies find a positive abnormal return in the subsequent 12-month period following implementation of this strategy; however, no study examines the impact of such rules on the short-term trading patterns (returns and volume) of related securities. This article fills this gap, finding that ETFs representing sectors experiencing positive (negative) momentum have higher (lower) returns on days associated with the execution of this momentum strategy. It also finds that calendar days coinciding with the implementation of this rule are associated with increased trading volume in related sector ETFs, particularly on the buy side in more recent periods.
Steven D. Dolvin and Jill Kirby. "Momentum Trading in Sector ETFs" Journal of Index Investing 2.3 (2011): 50-57.