Late in The Momentum Game

Momentum strategies in the stock market tend to work because they take advantage of the human tendency to herd. When a stock goes up it creates a buzz, which attracts more people and the stock goes yet higher. After reading The Quants, a book about the growing number of funds that employ quantitative strategies,  I realized that most quant strategies employ a combination of momentum and value. As increasing amounts of trading occurs through black boxes, momentum seems to be getting amplified.

While the market and stocks always go farther than anyone thinks possible, the recent tendency for momentum to persist is greater than anything I have seen. The momentum occurs to the upside and downside. The correction in January was extremely sharp and offered few bounces.

Morningstar recently has decided to add momentum as one of the factors it looks at. Many like to believe that the stock market moves solely on fundamentals, which is why it likely took people so long to accept that herding has an effect on the stock market. But it appears that momentum is finally having its day in the sun.

Those who embraced momentum strategies have had an absolute fiasco in the past year and have printed money. However, the death knell for every strategy is its acceptance by the broader public. I am not going to change my strategy and will stick to what I know. Mean reversion strategies will have their day in the sun again as well. However, I am aware of the tremendous momentum and have adjusted my trading to cope with it.

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