Research

Research Reports

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HOTNESS: HIGH TURNOVER HOT STOCKS EVENTUALLY GO COLD

In this paper, we explore the relationship between levels of speculative trading intensity (Hotness) and excess returns. We perform cross-sectional studies comparing the returns of Hot versus Cold stocks, which we differentiate with our proprietary measure of speculative trading intensity.

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GAP-DOWNS: THE BIGGER THEY ARE, THE HARDER THEY FALL

The brief highlights the effect of gap-downs on stock price performance over three subsequent months. The team compares price gap-downs from less than two standard deviations of average daily price move to more than four standard deviations in the U.S. market from January 1995 to September 2020 utilizing William O’Neil + Co.’s proprietary database.

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Volatility: Slow and Steady Wins the Race

Previous studies have found evidence of persistent underperformance of high-volatility stocks compared with lower-volatility stocks on a risk-adjusted basis. Consistent with prior studies, our cross-sectional research found that U.S. stocks in the top (highest) volatility quintile significantly underperform those in the bottom (least volatile) quantile such that long-short portfolios constructed on the basis of volatility quintile rankings generate significantly negative returns while remaining market-neutral. These volatility Q5–Q1 portfolios have positive exposure to size (SMB) and negative exposure to value (HML). However, these portfolios are prone to short-term losses during bear markets.

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Mind the Gap Size: Look For Two Sigma or More

In this paper, we studied patterns of stocks returns following price gap events across our U.S. universe from 1995–2020. We found generally that the size of the gap was sig-nificantly related to post-event excess returns for up to 10 weeks afterward. Gap-ups of less than two standard deviations (2σ) were generally indistinguishable from zero in terms of cumulative alpha expectations, however, gaps of 2σ to 4σ in magnitude had cumulative alpha of 1.06% on average, which rose to 2.19% for gap-ups greater than 4σ. These results suggest not only that incorporation of the arrival of new information into prices occurs with a tradable delay but that such effects are stronger as a function of the magnitude of information implied by the size of the gap.

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RS Rating: Pharma Flameouts and Small-Cap Values

In this paper, we perform a collection of segment-wise comparisons of the strength of William O’Neil + Co.’s proprietary Relative Strength (RS) Rating as a useful signal for identifying portfolios of stocks likely to outperform and underperform using quintile-based long/short portfolios constructed using the RS Rating. We compare on the basis of style (growth/value), size (large cap/small cap), market (U.S., China A shares, Hong Kong, and India), and industry sector.