New features in Value Screeners

Philip Vanstraceele 06 Nov 2011

This new factor - together with the other momentum factors (price index 12 months and price index 6 months) - in our Value Screener grid indicates a truth about investing that is difficult to understand: the investor should buy into strength and sell into weakness. The factor measures the proximity of a stock to its 52-week high or 52 week low. The 52 weeks price range is calculated as (current price – 52 week low) / (52 week high – 52 week low).

The idea behind using momentum factors with valuation is to find the strongest stocks or the ones that are going up the most in price. O'Shaughnessy, in his book “What works on Wall Street”, calculated relative strength by looking at the stocks' returns over the past year. Winners seem to continue to win. Price momentum is the market putting its money where its mouth is. O'Shaughnessy states that the longer the period you consider, the more regression to the mean you can see. According to him, there's a regression to the mean after about five years. Stocks that have exhibited five years of strong relative strength are usually on the brink of a turnaround (positive or negative). So results must favor shorter-term relative strength.

We also added the Price Index 6 months as a separate screener to combine with other valuation factors. In a paper which we will publish soon, we found that the combination of momentum factors with valuation factors results in powerful screens with high investment value.