Momentum investing: the one factor with decades of evidence

Say you notice that AMD has been climbing for months. Not exploding, just steadily grinding higher, week after week. A friend mentions it at dinner. "Stocks that have gone up tend to keep going up," she says, like it's obvious. Is she right? And if she is, why doesn't everyone just buy whatever went up last year and get rich?

This is momentum investing, and it happens to be one of the most studied ideas in finance. Not because it's exotic. Because it's stubborn. It keeps showing up in the data no matter how many researchers try to explain it away.

#The basic finding is almost embarrassingly simple

In 1993, two academics named Narasimhan Jegadeesh and Sheridan Titman looked at decades of US stock returns and found something odd. Stocks that had performed well over the past 3 to 12 months kept performing well, on average, for the next 3 to 12 months. Stocks that had done poorly kept doing poorly. This wasn't a one-off. It showed up in different decades, different countries, different asset classes — bonds, currencies, even commodities like wheat and oil.

Think of it like a shopping cart with one wheel slightly bent. Once it starts drifting left, it tends to keep drifting left for a while, not because the cart "wants" to, but because whatever caused the drift in the first place is still acting on it. Momentum in markets works similarly. Whatever pushed a stock up — better earnings, a new product, a shift in how people see the company — often keeps pushing for a stretch of time before it fades.

#Why would this even work, if everyone can see it

Here's the uncomfortable part for efficient-market believers: momentum shouldn't exist. If markets instantly priced in all available information, a stock that went up 20% last quarter would already reflect everything good about that company. There'd be no reason for it to keep going up more than any other stock.

The leading explanations are mostly about people, not math. Investors tend to underreact to good news at first — a strong earnings report gets partially priced in, then slowly "leaks" into the price over following months as more people notice, more analysts write about it, more headlines appear. There's also herding: once a trend is visible, other investors pile in, which extends it further. And there's a psychological one — investors hold onto losers too long hoping to break even, and sell winners too early to "lock in gains," which mutes the initial reaction and lets it continue longer than it should.

None of this means momentum is guaranteed or mechanical. It means that human behavior around news is slow and social, and that shows up as a statistical pattern over long stretches of market history.

#How an ordinary person can actually read this, without a finance degree

You don't need to compute anything to understand the core idea: has this thing been trending, and for how long, relative to its own past. Not compared to some other stock. Compared to itself.

This is where a lot of momentum tools go wrong for regular people — they compare a $2 stock to a $500 stock as if size tells you anything about behavior. It doesn't. A better question is: is this asset moving unusually for itself right now?

Take Micron (MU) today. It's trading at $920.95, but the number that matters more is that its trading volume — how many shares are changing hands — is running at 0.83x its own normal 20-day pace. That's actually below its usual activity, even with 32 news articles about it in the last 48 hours. Compare that to Eli Lilly (LLY), where volume is running at 0.70x normal, social sentiment is 94% bullish, but news coverage is comparatively light at 10 articles. These are two very different pictures, and neither one tells you where the price goes next. What they tell you is how much attention, relative to normal, each stock is getting right now.

AMC is a good example of the gap between chatter and confirmation. Sentiment there is 95% bullish — higher than any of the others listed — but there have been zero news articles in 48 hours and volume is still below its own average at 0.84x. That's a lot of enthusiasm without much fresh information driving it, and without unusual trading to back it up. It doesn't tell you the enthusiasm is wrong. It tells you to notice the mismatch.

#Where momentum quietly falls apart

Momentum has one famous, ugly flaw: it crashes. Not gently. Research on this (notably by Kent Daniel and Tobias Moskowitz) found that momentum strategies occasionally suffer sudden, sharp reversals — often right after market downturns, when beaten-down stocks snap back violently and the "losers" become the new winners overnight. In 2009, momentum-based strategies lost over 70% in a matter of months, right after doing fine through most of the 2008 crash. The trend didn't fade slowly. It broke.

This is the part that gets left out of the breathless version of momentum investing you see in headlines. A pattern that has held up for decades, across dozens of countries and asset types, still has stretches where it does the opposite of what you'd expect, with no warning bell ahead of time.

There's a second limitation worth naming plainly, because it's Momentu's whole reason for existing: momentum and unusual activity can tell you a move is more likely to be bigger than normal. They cannot tell you which direction that move goes. In a year-long test we ran across 50 stocks — roughly 10,500 separate readings — unusual volume preceded moves that were about 18% larger than normal for that stock. But it did not do better than a coin flip at predicting whether the move was up or down. Size, not direction. That distinction is the whole point, and it's easy to blur if you're not careful.

#What this means for the person reading a momentum score

A high momentum reading, like AMD's 73 out of 100 today, is not a prediction. It's a description — this asset has been behaving unusually relative to its own history, and unusual behavior in the past has, on average, preceded bigger-than-normal price moves. Whether that move is a gain or a loss, the data genuinely does not say. Anyone who tells you otherwise is selling something momentum research doesn't support.

What it's good for is noticing. Noticing when a stock's trading pattern has shifted from its own normal rhythm. Noticing when social buzz and actual trading activity agree, or don't. Noticing when news coverage spikes without a matching move in price, or the reverse. That's information. It's just not a forecast.

If you want to see how this looks day to day, across real stocks with real numbers instead of textbook examples, our free daily radar tracks it quietly, one plain-English reading at a time.

Momentu is an informational tool, not financial advice or a buy/sell recommendation, and it does not consider your personal circumstances. Any decision you make is your own.