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A Speed Bump for Momentum Investors

Yes, 2001 was a tough year. But the strategy's long-term track record speaks for itself

By Sam Stovall

Last year was a tough one for momentum investors' portfolios -- and egos. The average monthly performance for Relative Strength Rankings found on the S&P 1500 Sector Scorecard during 2001 was contrary to their longer-term trends.

First, a refresher course on RSRs. A Relative Strength Ranking is assigned based on the trailing six month price performances for the 115 industries in the S&P Super 1500. Those industries that posted six-month returns in the top 10% are given a ranking of "5". The next 20% get a "4", the middle 40% get a "3", while the lower 20% are assigned a "2", and the bottom 10% get an RSR ranking of "1".

Historically, the average performance for those industries with a ranking of "5" at the end of one month is better than that for the S&P Super 1500 in the succeeding month. Ditto for those industries with a ranking of "4", but not so for those industries ranked "3, 2 or 1".

In looking at the performance of the five ranking categories in 2001, it's clear that trends were very hard to establish and maintain. And it showed in the numbers. The industries ranked "5" posted an average monthly loss of 2.1% for the year, while those ranked "4" gave back a monthly average of 0.6%.

But the remaining groups actually moved to the upside, with the industries ranked "3" posting an average monthly gain of 0.5%, those flagged as "2" gaining an average of 1.1% and groups with a "1" rising an average of 0.5%.

Meanwhile, the benchmark S&P 500 Index posted an average monthly decline of 1.0% for 2001.

But superior long-term returns come from sticking with proven disciplines, even if they underperform every so often. With that in mind, here are the industries which carried an RSR of "5" as of Jan. 4, 2002.

Industry Company S&P STARS Rank
Air Freight & Couriers FedEx Corp. (FDX) 5 STARS
Computer & Electronics Retail Best Buy (BBY) 4 STARS
Consumer Electronics Harman International (HAR) Not Ranked
Fertilizers & Agricultural Chemical IMC Global (IGL) 5 STARS
Footwear Reebok (RBK) 4 STARS
Home Furnishings Mohawk Industries (MHK) 5 STARS
Metal & Glass Containers Pactiv Corp.(PTV) 5 STARS
Networking Equipment Black Box (BBOX) 4 STARS
Specialty Stores Bed, Bath & Beyond (BBBY) 4 STARS
Trucking Roadway Express (ROAD) 4 STARS
Water Utilities Amer. Water Works (AWK) 3 STARS

Stovall is senior investment strategist for Standard & Poor's

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