Tactical Equity Investing Across Bull and Bear Markets

Abstract

This article investigates the influence that the market state (bull versus bear) has on investment strategies based on characteristics such as size, value, and momentum. The authors find that the precise definition of positive and negative markets has a substantial effect on the results, with shorter-term definitions proving to be more useful. Size effects are largely confined to positive market states, while value, as defined by dividend yield, has defensive characteristics and outperforms during negative periods. Momentum, in contrast, provides positive excess returns across both market states. This result persists when size and value are controlled for in all but the very smallest of stocks. The authors show that portfolio performance can be improved by investing tactically using market state analysis.