The empirically documented tendency for stocks that have outperformed recently to continue outperforming in the near to medium term.
“I believe in buying strength and selling weakness. I buy stocks that are already rising in price. — Richard Driehaus”
— Richard Driehaus
Deeper Explanation
The momentum factor is one of the most robustly documented anomalies in financial markets. Stocks in the top decile of 12-month returns (excluding the most recent month) have historically continued to outperform the bottom decile over the next 6-12 months. Momentum is strongest in mid and small-cap stocks and across countries, suggesting it is a fundamental market phenomenon rather than a US-specific artefact. Explanations include: slow diffusion of fundamental information (analysts gradually revise estimates), institutional herd behaviour (funds chasing performance), and investor underreaction to improving business trends. Momentum strategies must have strict exit rules: momentum reverses sharply at turning points.
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Go deeper into the Momentum school — frameworks, case studies, and decision systems.