{"id":242028,"date":"2026-04-27T13:29:44","date_gmt":"2026-04-27T17:29:44","guid":{"rendered":"https:\/\/ibkrcampus.com\/campus\/?p=242028"},"modified":"2026-04-27T13:33:48","modified_gmt":"2026-04-27T17:33:48","slug":"the-skip-month-mystery-what-last-months-returns-are-really-telling-you","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/ibkr-quant-news\/the-skip-month-mystery-what-last-months-returns-are-really-telling-you\/","title":{"rendered":"The Skip-Month Mystery: What Last Month\u2019s Returns Are Really Telling You"},"content":{"rendered":"\n

The article “The Skip-Month Mystery: What Last Month\u2019s Returns Are Really Telling You” was originally published on Alpha Architect<\/a> blog. <\/em><\/p>\n\n\n\n

New research challenges a long-standing rule in momentum investing\u2014and reveals surprising insights about when to use it<\/em><\/p>\n\n\n\n

For decades, investors using momentum strategies have followed a simple rule: ignore last month\u2019s returns. This \u201cskip-month\u201d convention has been standard practice since the 1990s, designed to avoid short-term reversal effects where stocks that jump up one month tend to fall back the next.<\/p>\n\n\n\n

But what if that ignored month is actually telling you something important?<\/p>\n\n\n\n

Dibyam Dikhit, author of the January 2026 paper \u201cThe Informational Role of the Most Recent Month in Industry-Level Momentum Strategies<\/a>,\u201d examined nearly 50 years of industry-level returns and found that the most recent month contains economically meaningful information\u2014not just noise to be filtered out. The findings suggest investors should think about the skip-month rule differently: not as a universal best practice, but as a conditional tool that works better in some market environments than others.<\/p>\n\n\n\n

What Dikhit Examined<\/h2>\n\n\n\n

The study analyzed the Fama-French 48 industry portfolios from 1975 through 2024, comparing two momentum strategies with the analysis focusing on long-only momentum portfolios, in which returns are computed as the equal-weighted average of the selected industries during the holding month:<\/p>\n\n\n\n

The 12-1 strategy (standard approach): <\/strong>Ranks industries based on their returns from 12 months ago through 2 months ago, explicitly excluding the most recent month. Each month, the strategy invests equally in the top 5 performing industries.<\/p>\n\n\n\n

The 12-0 strategy (includes recent month): <\/strong>Ranks industries based on returns from 12 months ago through last month, including that most recent month in the calculation.<\/p>\n\n\n\n

Rather than simply asking which strategy performed better, the researcher dug deeper: How do returns and volatility from the prior month help predict future momentum performance? And how does including or excluding that month change the strategy\u2019s sensitivity to different market conditions?<\/p>\n\n\n\n

To answer these questions, the study classified each month into regimes based on whether the previous month\u2019s return was above or below its trailing average, and whether volatility was elevated or calm. This created four distinct market states:<\/p>\n\n\n\n