After 2009 was such a bad year for price momentum as an investment factor, we wanted to see if there were any clues as to whether it will be a good factor in 2010. Before determining whether momentum will rebound in 2010, we decided to tackle momentum in January 2010.
Looking at the last twenty years, we were able to determine a pattern. When the VIX has increased relative to an 180 point moving average VIX, momentum is less likely to be effective as a factor. However, when the VIX has decreased relative to the moving average VIX, then momentum is more likely to be effective. The correlation between the change in the VIX and the subsequent one-month decile spread for momentum is nearly -.60. Too few data points to get overly excited and take it to the bank. However, the change in the VIX this year is the largest it's been in our sample which goes back 20+ years, down about 18%.
Therefore, we're expecting momentum to be a strong investment factor this January.
January_Momentum.pdf
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