Companies that are smaller come with a lot of investment risks, such as illiquidity, and they can also present more analytical challenges if their earnings are less transparent owing to management bias. Smaller companies may have lower quality financial statements because of weaker internal controls to catch accounting misstatements.
An additional benefit of investing in small U.S. companies is the ability to shield your portfolio from global economic risks because a lot of them are focused on the domestic market. Earnings momentum next quarter compares the three quarters of trailing operating earnings per share – plus the estimated EPS for next quarter – with the four quarters of trailing operating EPS.
Lastly, we used the market price relative to the 80-day moving average. This is another momentum indicator. I have found that when the market price falls below the 80-day moving average by 5 per cent or more, the market continues to sell off.