Momentum was a driving force for the market in 2024 until momentum peaked on July 9. Momentum resumed its upward climb at the end of July, and the question now is whether momentum will continue to be a force, perhaps driving the market upward as it did before the summer. The problem with expecting sustained momentum strength is that reversal has consistently performed well since mid-June. Momentum means stocks are trending; reversal means stocks aren't trending. They shouldn't both continue to work well.
When Quants define momentum, they typically ignore the most recent month's performance since price reversal over the recent month can be transient noise in the evidence for a longer-duration trend. Our analysis measures a stock's momentum by its return over the past year, excluding the most recent month. The momentum factor return here is the return to a long-short, sector-neutral portfolio of S&P 500 stocks, which is rebalanced monthly.
Stocks are also rebalanced monthly for the reversal factor return, the sector-neutral return produced by taking long positions in previous losers with short positions in previous winners. Since momentum excludes the most recent month's performance, which is the focus of reversal, there can be periods where momentum and reversal behave similarly.
The chart shows the cumulative returns to momentum (orange line) and reversal (blue line) since the end of 2016. There are extended periods when momentum wins, such as in 2017 and again in the first half of 2018. And periods when reversal wins, like April 2018 through the summer of 2019. The chart's right shows momentum's success in 2024, which stalled in early July and is now recovering. The right of the chart also highlights the reversal factor's 2024 performance, which has been rising steadily since mid-June, producing better returns with lower volatility than momentum. At this point in the competition, reversal is the favorite.
