Momentum investing sounds almost too simple: buy what's going up, sell what's going down. It runs against the instinct to buy dips and sell rallies. Yet it's one of the most well-documented anomalies in finance — persistent across markets, time periods, and asset classes.
Understanding why momentum works, and how to apply it without getting burned by reversals, is the foundation of everything Momentum Capital does.
The Academic Foundation
In 1993, Narasimhan Jegadeesh and Sheridan Titman published a landmark paper showing that US stocks that performed well over the past 3–12 months continued to outperform over the following 3–12 months. The momentum "factor" was born.
Since then, the finding has been replicated across:
- —International equity markets (Europe, Asia, emerging markets)
- —Asset classes: bonds, currencies, commodities
- —Time periods dating back to the 1800s
- —Sector and industry ETFs
- —Crypto assets
The momentum factor sits alongside value and size in the Fama-French factor model. It's not a trading glitch or data artefact — it reflects genuine, persistent market behaviour.
Why Does Momentum Persist?
Two behavioural explanations dominate the academic literature:
Under-reaction to information
When genuinely good news hits a sector — earnings beats, commodity supply shocks, regulatory tailwinds — investors process it too slowly. They anchor to prior prices. The result: a sustained drift upward as the market gradually reprices the asset. Momentum strategies systematically exploit this drift.
Herding and trend-following
Once a sector starts rising, institutional flows chase it. Trend-following funds allocate more. Media attention increases. The positive feedback loop sustains price appreciation beyond fundamental justification — until it doesn't. The EMA filter we use is designed to catch the early exit before the reversal accelerates.
Momentum Applied to Sector ETFs
Individual stock momentum carries a risk: company-specific events (earnings misses, fraud, product failures) can wipe out a position overnight. Sector ETFs eliminate this idiosyncratic risk — you're betting on the direction of an entire industry, not a single company's fortunes.
Our universe of 18 themes spans the full breadth of investable sectors: equities (tech, healthcare, energy), commodities (gold, silver, uranium), and direct crypto (BTC, ETH). At each rebalance, every theme competes on equal terms — pure price momentum over a 16–26 week lookback window determines the ranking.
The Lookback Window: Why 16–26 Weeks?
Momentum research consistently shows that returns from the very recent past (1–4 weeks) predict reversal — mean reversion over short horizons is a separate, competing effect. Returns from 3–12 months out (the "formation period") are the strongest predictor of near-term continuation.
Our Balanced mode uses a 16-week lookback — right in the sweet spot for capturing medium-term momentum while avoiding the very short-term reversal zone. Growth mode extends to 26 weeks to focus on slower, more established trends.
The Risk: Momentum Crashes
Momentum strategies have a known vulnerability: sharp, sudden reversals after periods of extreme outperformance. When the market snaps back violently — as it did in 2009 after the GFC, and briefly in early 2020 — momentum portfolios can take outsized hits.
This is why the EMA trend filter is non-negotiable in our system. By requiring that any sector be in a confirmed uptrend before we enter, we avoid chasing sectors that are already decelerating into a potential crash.
The filter doesn't prevent all drawdowns — nothing does. Our max drawdown over 19 years is −47.3%. But it prevented the worst of the 2018–19 and 2022–23 crypto crashes from hitting the portfolio, and softened the 2008 drawdown to −4.6% vs SPY's −40.4%.
Momentum in Practice: What It Feels Like
Following a momentum strategy requires resisting every instinct. You'll be told you're chasing. You'll hold sectors that already look expensive. You'll sit in cash or gold when everyone else is buying the dip on tech.
The discipline pays off not because momentum is always right, but because it's systematically right more often than it's wrong — and it exits before the worst damage when trends reverse.
The live dashboard does all the ranking for you. Every week, it shows which sectors currently lead on momentum and which pass the trend filter. You don't need to understand every data point — the system surfaces the signal.