Is Momentum Overgrazed?

My previous post addressed the issue, “Is the stock market overgrazed?” It raised questions about the forward-looking expectations for the beta, size and value premiums that have existed historically. Researcher Claude Erb showed that each of these premiums has been declining over time, leading to at least the suspicion that they have been “overgrazed.” *Erb noted that the one place that a declining premium had not been noted is in the case of small value stocks.

Erb specifically looked at the question of has the momentum premium been overgrazed in a paper, “Momentum Has Not Been ‘Overgrazed’: A Visual Overview in 10 Slides.” Erb shows that while the large-cap momentum premium has declined from 12.5 percent to 7.5 percent a year, it’s still well above the equity risk premium, which has declined from 8.5 percent to 4.3 percent. He also showed that the small cap momentum premium, while declining, is still above 10 percent.

Read the rest of the article on Seeking Alpha.

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