What is Momentum?

Momentum is the tendency of assets that have performed well over the past months to keep performing well for a while — and of laggards to keep lagging. It is one of the most thoroughly documented effects in finance, found in stocks, bonds, commodities and currencies across more than a century of data.

There are two flavours. Time-series momentum compares an asset with its own past ("is it higher than 12 months ago?") and is the basis of trend-following. Cross-sectional or relative momentum ranks assets against each other ("which markets are strongest?") and is used to choose what to own.

Momentum works on average, not every time: sharp reversals — for example right after a market bottom — are its main weakness.

By Dr. Harry Hamann