- 1Momentum = buying recent winners, avoiding recent losers
- 2Stocks with strong 6-12 month returns tend to continue outperforming
- 3The momentum premium is ~7-8% annually (one of the strongest factors)
- 4Momentum crashes are rare but severe — risk management matters
- 5Combining momentum with value creates a powerful multi-factor approach
#What Is Momentum Investing?
Momentum is the tendency for stocks that have risen recently to continue rising, and for stocks that have fallen to continue falling. It was documented by Jegadeesh and Titman (1993) and has been replicated across:
- Every major stock market globally
- Bonds, commodities, and currencies
- Time periods spanning over 200 years
It's arguably the strongest and most persistent anomaly in financial markets.
#How We Measure Momentum
Our Momentum factor uses 12-month price return, excluding the most recent month. This is the standard academic measurement, sometimes called "12-1 momentum."
Why Exclude the Last Month?
The most recent month often shows short-term reversal — stocks that jumped in the past few weeks tend to pull back. By excluding it, we capture the medium-term trend while avoiding short-term noise.
The Lookback Period
| Period | What It Captures |
|---|---|
| 1 month | Short-term reversal (avoid) |
| 3 months | Recent momentum |
| 6 months | Medium-term trend |
| 12 months (ex. last month) | Standard momentum (our metric) |
| 3-5 years | Long-term reversal |
#Why Momentum Works
Several theories explain the momentum premium:
1. Behavioral Underreaction
Investors are slow to update their views when fundamentals change. Good news gets priced in gradually, not immediately.
2. Herding
As more investors notice a rising stock, buying pressure increases, pushing the price higher.
3. Confirmation Bias
Investors seek information that confirms what's already happening, amplifying trends.
4. Disposition Effect
Investors sell winners too early (to "lock in gains") and hold losers too long (hoping to "break even"), slowing price discovery.
#The Risk: Momentum Crashes
Momentum's biggest weakness is occasional severe crashes. When market trends suddenly reverse (like March 2009 or November 2020), momentum portfolios can drop 20-40% in weeks.
These crashes tend to happen: - At market bottoms when beaten-down stocks surge - During regime changes (value ↔ growth rotations) - After periods of very strong momentum performance
This is why we use momentum as one factor among six rather than a standalone strategy.
#Momentum by Sector
| Sector | Momentum Characteristics |
|---|---|
| Technology | Often momentum leaders in bull markets |
| Healthcare | Biotech creates strong momentum signals |
| Energy | Commodity cycles drive momentum |
| Financials | Rate-sensitive momentum |
| Consumer Discretionary | Trend-driven spending patterns |
#View Our Momentum Rankings
Our rankings let you sort by Momentum factor score to find stocks with the strongest recent trends.
For a more balanced approach, look at stocks scoring high on both momentum and value — the academic research shows this combination is particularly powerful.
Last updated: February 6, 2026