There are still good reasons for investors to pursue a momentum strategy, writes Mark Hulbert in a recent Wall Street Journal article.

He offers data collected by Eugene Fama (University of Chicago) and Kenneth French (Dartmouth College) showing that over the past ten years the stocks in the top decile vis a vis performance outperformed the S&P 500 by just 1.3 percentage points. “That is less than one-fifth as much as the strategy’s average annual advantage over the past 90 years, and certainly not enough to pay the considerable expenses…involved in the high turnover of a momentum portfolio.”

But Hulbert argues that this has happened before, citing findings of Kent Daniel, a finance professor at Columbia University, that show a similar drop in the late 1930s and early 1940s:

According to Professor Daniel: “So, as frustrating as recent experience has been, it isn’t a reason in itself to conclude that the momentum strategy has permanently stopped working.”

Another factor, writes Hulbert, is that a momentum strategy would “stop working only if its underlying causes disappeared.” One such cause, he notes, relates to human psychology, and “in particular to our tendency to react irrationally when confronted with new information.”

Hulbert cites a suggestion by Daniel as to how to improve the profitability of momentum investing. “Momentum works best when market volatility is low,” writes Hulbert, “and periods of high volatility tend to be clustered together.” He explains: “This means a trader should be able to improve returns by having a high allocation to momentum stocks when volatility is low, and investing instead in an index fund when volatility is high.”