Key Takeaways
- • A January 2026 research paper by Dibyam Dikhit challenges the decades-old "skip-month" convention in momentum investing, which has excluded the most recent month's returns from strategy calculations since the 1990s to avoid short-term reversals.
- • Analysis of Fama-French 48 industry portfolios spanning 1975–2024 reveals that the most recent month contains economically meaningful information rather than mere noise, suggesting the skip-month rule functions as a conditional tool rather than universal best practice.
- • The study compared two industry-level momentum strategies: the standard 12-1 approach (excluding the most recent month) versus a 12-0 strategy (including it), both using equal-weighted rankings of the top 5 performing industries with monthly rebalancing.
- • Findings indicate that investors should reassess when and how to apply the skip-month rule based on specific market environments rather than applying it uniformly across all conditions.
Summary
For nearly three decades, institutional investors employing momentum strategies have operated under a consistent principle: disregard the previous month's returns. This "skip-month" convention emerged in the 1990s as a mechanism to mitigate short-term reversal effects—the empirical tendency for stocks exhibiting strong monthly gains to experience subsequent weakness. However, new research published in January 2026 fundamentally questions whether this widely accepted practice actually discards valuable market signals.
Dibyam Dikhit's paper, "The Informational Role of the Most Recent Month in Industry-Level Momentum Strategies," examined nearly 50 years of industry-level performance data from the Fama-French 48 industry portfolios (1975–2024) to test the conventional wisdom. The research compared two competing approaches: the traditional 12-1 momentum strategy, which ranks industries based on returns from 12 to 2 months prior while explicitly excluding the most recent month, versus a 12-0 strategy that incorporates the most recent month into the ranking calculation. Both strategies employed equal-weighted allocation to the top 5 performing industries, with monthly rebalancing during the holding period.
The study's central finding challenges the binary treatment of the skip-month rule. Rather than discovering that recent returns are entirely predictive or entirely noisy, Dikhit's analysis suggests that the most recent month contains economically meaningful information whose utility depends on prevailing market conditions. This conditional insight reframes the skip-month convention from an ironclad rule into a flexible tool that institutional investors should apply selectively rather than uniformly across all market environments and time periods.
For hedge funds, family offices, and factor-based investors managing industry or sector exposure, these findings carry practical implications. The research suggests that momentum strategy optimization may require dynamic adjustment of lookback windows based on market regime or other systematic factors, rather than static adherence to historical conventions. This could enhance risk-adjusted returns in certain environments while potentially reducing performance degradation during periods when short-term reversals dominate.
Dibyam Dikhit's paper, "The Informational Role of the Most Recent Month in Industry-Level Momentum Strategies," examined nearly 50 years of industry-level performance data from the Fama-French 48 industry portfolios (1975–2024) to test the conventional wisdom. The research compared two competing approaches: the traditional 12-1 momentum strategy, which ranks industries based on returns from 12 to 2 months prior while explicitly excluding the most recent month, versus a 12-0 strategy that incorporates the most recent month into the ranking calculation. Both strategies employed equal-weighted allocation to the top 5 performing industries, with monthly rebalancing during the holding period.
The study's central finding challenges the binary treatment of the skip-month rule. Rather than discovering that recent returns are entirely predictive or entirely noisy, Dikhit's analysis suggests that the most recent month contains economically meaningful information whose utility depends on prevailing market conditions. This conditional insight reframes the skip-month convention from an ironclad rule into a flexible tool that institutional investors should apply selectively rather than uniformly across all market environments and time periods.
For hedge funds, family offices, and factor-based investors managing industry or sector exposure, these findings carry practical implications. The research suggests that momentum strategy optimization may require dynamic adjustment of lookback windows based on market regime or other systematic factors, rather than static adherence to historical conventions. This could enhance risk-adjusted returns in certain environments while potentially reducing performance degradation during periods when short-term reversals dominate.
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