These investments have a tendency to crash and burn
A new study has found a way to avoid what has proven to be the Achilles' heel of momentum strategies - their tendency to occasionally crash and burn.
Momentum strategies invest stocks with the best trailing-year returns and sell short those with the worst. Numerous academic studies have found the approach to be one of the most profitable over the decades. But these strategies' long-term success comes with a significant qualification: their occasional huge losses - known as momentum crashes.
The accompanying chart illustrates this history. It plots the trailing 12-month difference between two portfolios: The first contains the 10% of stocks with the best recent performance and the second owns the lowest-performing decile. Although most of the time over the past century the highest momentum stocks outperformed those with the lowest momentum, you can't miss the momentum crashes.
The new study that found a way to sidestep those crashes was published in the Journal of Banking & Finance. The study, "Decomposing momentum: The forgotten component," was conducted by three researchers at Germany's University of Münster: Pascal Büsing, Hannes Mohrschladt and Susanne Siedhoff. Their solution is remarkably simple: Instead of using the traditional academic definition of momentum, measure each stock's return from where it stood 12 months ago to its highest price between then and one month ago.
This alternate approach is illustrated in the accompanying chart of Hecla Mining $(HL)$. The traditional approach would be to measure its return over the period from 12 months ago to one month ago, which in Hecla's case would be a gain of 140%. In contrast, over the alternate period proposed by this new study's researchers, Hecla would be entered into a list of momentum stocks, with a gain of 455%. Those at the top of such a list would be purchase candidates and those at the bottom would be candidates for short selling.
To appreciate the dramatic impact of changing the period over which momentum is defined, the authors of this study focused on the 10 individual months from the past century in which the traditional momentum strategy suffered its worst crashes. In those months the strategy's average loss was 44.3%, which is huge over any period, much less one month. This is the reason why many investors are wary of momentum strategies. In contrast, the researchers' alternate momentum strategy lost an average of only 2.4% during those same months. By dramatically reducing these losses, this alternate strategy significantly outperformed the traditional approach both in terms of raw, unadjusted performance as well as risk-adjusted performance.
One of the reasons that the researchers' approach works is that it helps to differentiate high momentum stocks that are still trading close to their 52-week highs from those (like Hecla, in my example) that have dropped back. Investor sentiment for this latter group will have started to cool, relative to those in the former group, and are therefore less vulnerable to momentum crashes.
The following tables apply the study's new approach to stocks in the Russell 1000 index RUI, which contains the largest-cap U.S. stocks.
These are the 10 stocks with the highest momentum:
Applied Optoelectronics Momentum period* % gain Sandisk +3,438% Bloom Energy +1,207% Lumentum Holdings +1,091% Applied Optoelectronics +784% Western Digital +705% Ciena +645% Vicor +596% Micron Technology +583% Planet Labs +570% Intel +503% *Return from 12-month-ago price to highest price between then and 1 month ago Sources: LSEG, Hulbert Ratings
These are the 10 stocks with the lowest momentum:
Name Momentum period* % gain SLM +2% Otis Worldwide +2% Dynatrace +2% SEI Investments +1% Mosaic +1% Walt Disney +1% Factset Research Systems +1% Silgan Holdings +1% Booking Holdings +0% Albertsons +0% *Return from 12-month-ago price to highest price between then and 1 month ago Sources: LSEG, Hulbert Ratings
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
-Mark Hulbert
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July 09, 2026 07:00 ET (11:00 GMT)
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