Hi everyone!

During COVID, the healthcare sector became the focus of the stock market. Medication research took time, but it was required to publish results for each testing stage. During this time, companies that showed they might deliver effective vaccines, drugs, or other technologies that aid medical services, boosted the prospect of their future earnings. Investors wanted to profit when these companies manufactured their products at a large scale, so the stock price, as a valuation of the net present value of future earnings, would increase.

To capture the excitement of healthcare investors, we developed a momentum factor for the healthcare sector. The factor compares the 100-day EMA against the 300-day EMA. The stocks that had the largest 100-day EMA, relative to their 300-day EMA, had the most short-term momentum from their long-term trend. We selected the stocks with the most short-term momentum and formed an equally-weighted portfolio. Note that we warmed up the indicators in a warm-up period to avoid making a history request during each universe selection.

The results were quite promising in the first 3 quarters of 2021, but they plummeted afterward. Is our original hypothesis only valid during the start of COVID? Does the transition of COVID from a pandemic into an endemic change investor behavior? Let us know what you think in the comments below!

Best,
Derek Melchin