Right, so the explanation doesn't satisfy you. Fair enough. Many different roads to paradise and all that.
Just don't claim that there haven't been any explanations given, when they have been given ad nauseum.
And I believe, by the way, that macro-economic argument put forth gives a reasonable explanation for the time period specific effects of the momentum anomaly.
It seems to me that your argument is simply the efficient market hypothesis warmed over. And your objections towards momentum can be equally well deployed against value investing, size effects, and quality factors.
If you think the market is a perfectly efficient entity that is comprised of rational actors, then that is the fundamental point of our disagreement and we should just leave it at that.
We're starting to go back in circles again, but it's not that the explanation doesn't satisfy me. It's that, as far as I can see, no explanation has been given. The explanation that a 3-12 month window works because that is what has worked is not an explanation.
But perhaps I missed the explanation, because I'm not sure what you're referring to about the macro-economic argument giving an explanation for the specific time period -- can you elaborate, or point me to where that is discussed in the thread or the linked materials?
I'm also not sure what argument you think I'm making in reliance on the EMH. I'm not really making any argument, just questioning whether any logical explanations exist to believe that the specific lookback window that worked in the past will persist into the future. As I said earlier, I agree that compelling reasons have been offered for the existence of momentum in price movements, and in general I usually find myself on the side of debates arguing against strong versions of the EMH (which is why I formed my fictitious eponymous corporation).
More to the point what evidence do you have that DM is strengthened by popularity at all, as you have suggested?
I can't tell if sol is being serious or just wrapping his commentary in his trademark deliberately inflammatory rhetoric, but the DM strategy relies on the persistence of a historical pattern into the future, so of course it would be strengthened by self-reinforcing popularity (as opposed to a change in market movement patterns that eliminates the momentum anomaly).
You've already stated that you believe that there are compelling reasons (behavioral) for price momentum (aka relative momentum.)
So your question is really why a specific look back period between 3 and 12 months should work as an absolute momentum filter.
Here is a direct copy and paste job from what I have termed the macro economic argument for the effectiveness of absolute momentum (or trend following) more specifically....
"So the question is obvious: Why should these approaches work? In other words what guarantee is there that just because bear markets have looked a certain way in the past, they will continue to look that way in the future?
There are no guarantees. And there is an example in the past where these approaches have not protected its practitioners from feeling the full brunt of a market downturn (The flash crash of 1987.) and there is no reason why whipsaws cannot randomly happen in the future.
But there is reason to believe that future bear markets will continue to look enough like past bear markets that trendfollowing approaches will continue to almost always work at mitigating draw downs.
Why do I say this? Because when we are talking about large scale expansion and recession, we are talking about the business cycle. And when we are talking about the business cycle we’re talking about the movements of a large economies. And large economies are like battleships, not Jet Ski’s. They cannot turn on a dime.
It takes time for bubbles to inflate. And it takes time for risks to work their way through a system. And when an economy begins shrinking, it takes time to for those in power to recognize that it is in fact shrinking. And when second order actions occur, and interest rates are dropped by central banks, and stimulus bills are passed by governments, it takes time for the pain to work its way through the system, and for the corrective actions to have any effect at all.
And past a point, no matter how long the bear market lasts, for the remainder of the draw down, the trend follower will outperform the broad stock market which will continue losing value even as the trend follower’s portfolio is sitting in safe assets.
So a bear market really cannot be too long. It can only be too short for a trend follower.
And how short is too short? A draw down is too short if only short-term treasuries do not outperform the risky assets for the lookback period in a dual momentum portfolio prior to the beginning of the next market recovery.
And note that in this instance the trend following approach does not underperform, it merely fails to outperform.
The only real problem arises when there is a very rapid drawdown followed by an immediate and slow recovery, as was the case with the Flash crash and recovery following Black Monday in 1987. Such an occurrence is a scary prospect for this approach, but it’s also been a very rare occurrence historically.
So when you combine the business cycle scale effects that make it very unlikely for future bear markets not to last for similar time frames as in the past (or longer,) with a strategy that is very good at recognizing bear markets as long as they do not occur too quickly, you have a compelling argument for why trend following should remain robust in its ability to diminish drawdowns long into an unknowable future."
As to the timing effects, these are clearly just empirical observations regardless of the strategy. So momentum is a medium-term phenomenon, reversals are a short term phenomenon, and value is a longer-term phenomenon.
We can come up with clever stories for why these time effects exist, post Facto, but why bother? If you want to invest in momentum it only makes sense to use a The timeframe for your investments in which momentum actually empirically exists.
Similarly if the value story of "buying things cheaply" makes sense to you, you will perform very poorly indeed if you try to daytrade using a value strategy. (This is why value investors tend to have long holding periods.)
Or to put it in your terms, equitieshave been observed to be risky on a short-term basis relative to bonds, but safer on a long-term basis when it comes to preserving capital. For this reason buy and holders overweight equities for long-term goals, and overweight fixed income for short-term goals. It's using data to make decisions, which is usually smart.
As to the Sol question, I'll let him answer for himself, but I'll just point out that your explanation would work equally well for an equity overweighted buy-and-holder (like you and Sol) advocating for overweighting equities and having other people buying equities and bidding up the price of equities.