BETTING on overreaction — assuming that stocks move too far on new information and will reverse course — is more successful in China than any other market, according to quantitative strategists at Morgan Stanley.

Reversals of the trend seen during the previous few months tend to beat momentum trading, analysts wrote in a report.

While chasing recent winners has been a successful strategy in most markets, it doesn’t work so well in China over a 12-month period, they wrote.

“Retail investors tend to trade stocks on historical price trends and market rumors, a practice in China known as ‘stir-frying stocks,’” the report said.

New information tends to spur buying and selling by “rational speculators” who anticipate a stampede of “noise traders.”

Quant strategies are becoming increasingly common in China as the country gains wider inclusion in global benchmarks compiled by the likes of MSCI Inc., FTSE Russell and S&P Dow Jones Global Indices LLC.

“The common perception is that retail investors tend to rely on price momentum, speculation and headlines rather than fundamentals when making investment decisions,” Morgan Stanley’s analysts wrote.

“There could be more facets to retail investors’ behavioral bias, which lead to various unique trading patterns in China’s A shares.”

To be sure, such a reversal strategy is more easily said than done — restrictions against short-selling by foreigners make it difficult to bet against winners. (SD-Agencies)