Skip to content
All library documents

Industry Crowding Measures Combined with Momentum for Sector Allocation

Article BigQuant
Read the original

Summary

This research framework measures crowding in equity industries using price and trading activity. It groups candidate indicators into trend-oriented measures, including price deviation and moving-average dispersion; supplementary measures such as turnover, size-weighted CSAD, trade-size relationships, small-order volume, and price-volume correlation; and cross-industry measures such as excess-return skewness and trading share. The central allocation idea is to balance an industry’s own trend with a moderate crowding level. Low crowding alone can be misleading because declining industries may also become less crowded, creating a risk of entering too early.

The summary reports that the most crowded industry groups had negative cumulative excess returns versus an equal-weight industry portfolio during 2016 through June 2022: the top five, eight, and ten groups are reported at -38%, -26%, and -14%, respectively. A separate equal-weight portfolio combining industry momentum and crowding is reported to have annualized returns of 15.15% and excess returns of 12.48% over the equal-weight industry benchmark through May 30, 2022. These are reported backtest findings; the available summary does not provide implementation details or establish that the results generalize beyond the tested period.

Key ideas

  • Crowding can be measured with price trends, trading activity, and comparisons across industries.
  • High crowding may compress future excess-return potential without immediately causing a trend reversal.
  • Selecting only low-crowding industries can lead to premature entries when falling prices reduce crowding.
  • The proposed allocation approach combines industry momentum with crowding rather than using either measure alone.
  • The reported historical backtests show weaker relative results for the most crowded groups and stronger results for the combined portfolio.

Tags

EquitiesChina marketsFactor investingMomentumBacktestingPortfolio construction

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.