Momentum investing using the 52-week high method at the Nairobi Stock Exchange

Abstract

When coupled with a stock's current price, a readily available piece of information-the 52-week high price-explains a large portion of the profits from momentum investing. Nearness to the 52-week high dominates and improves upon the forecasting power of past returns and for future returns. This study set out to determine the presence of momentum at the Nairobi Stock Exchange and the possibility of generating abnormal returns using the 52-week high method. The various formation strategies for 3, 6, 9 and 12 months was developed and the ratios that determined their rankings was calculated. The stocks were then ranked in ascending order with the winner portfolio consisting of a third of the counters whose ratios were the furthest from 1 and the loser portfolios drawn from the stocks whose ratio was nearest to 1. The t-statistic is used to test the hypothesis. From the results it can be inferred that it is possible to beat the NSE market by investing in stocks whose prices are furthest from the its 52- week high in the short-term and divesting from those whose prices are at or closest to their 52-week highs also in the short-term. Future returns forecast using the 52-week high does not reverse in the long run. These results indicate that short-term momentum and longterm reversals are largely separate phenomena, which presents a thallenge to current theory that models these aspects of security returns as integrated components of the market's response to news.