Valuation does not guarantee price, which is what we are trying to forecast. More often, valuation is a measure of risk level. Price, as many of us , learned in Economics 101, is determined by the laws of supply and demand which are in turn bounded by the human emotion of fear and greed! What's unique about price momentum based ranking system that no other variable claim, is that price cannot diverge from itself. Valuation, earnings estimates, economic fundamentals all have potential to move in the opposite direction of price, but price cannot diverge from itself. As a result, price momentum based ranking systems will lock on to the correct side of the trends. They also tend to get us out after a modest drawdown, thereby allowing profits to run while losses are cut short.
Source: Being Right or Making Money by Ned Davis Research (The above post is an excerpt from a post originally published on Pradeep Bonde's Stockbee blog.)
Source: Being Right or Making Money by Ned Davis Research (The above post is an excerpt from a post originally published on Pradeep Bonde's Stockbee blog.)
