[[Start here]] → [[What works in stocks?|what works]] → [[expose to return drivers|drivers]] → strong beats weak --- ![[strong-beats-weak.png.png]] Strong stocks with rising share prices, tend to beat weak stocks with falling share prices. This is known as "*momentum*". It's the most powerful driver of stock returns, even more powerful than value. Here are some of the themes I will be filling out gradually on this subject over time: ## The characteristics of momentum - [[momentum is structured across three timeframes]] - [[momentum continues for three to twelve months]] - [[momentum reverses after three to five years]] - [[momentum reverses in the short term]] - momentum is stronger among small caps - momentum zigs when value zags - momentum is better as a slow boiled frog - there are two forms of momentum - time series and cross sectional - For both, it’s likely that [[smooth trends beat volatile trends]] ### What leading indicators for momentum? * [[big jumps on earnings announcements predict future drift]] * [[high trading volume often leads to short-term strength]] - ==shares close to 52 week highs tend to outperform== ## When momentum works - momentum can crash at the bottom of bear markets - momentum works best when high yield spreads are tight - ==don't buy high momentum stocks after big stock market declines==. ## Why momentum works - investors react slowly to good news, which creates trends - investors join bandwagons which extend trends - price anchoring creates the foundations for trends The obvious point here is that buying stocks at new highs goes against human instincts. We're hard-wired to buy when prices drop and sell when prices rise which creates a collective reluctance to “pay up” for stocks on the move. This leads to price under-reaction in the short term. Markets tend to digest new information slowly and investors stay anchored on previously low prices. Over time, prices start to wake up, and investors join the bandwagon, which leads to an extended price trend and a trend over-reaction in the medium to longer term. ## How to assess trends and trend changes - [[share prices exist in four stages]] - [[strong shares break out of bases on high volume]] - [[volatility often contracts before the best breakouts]] ## References * Fact, Fiction and Momentum Investing