Is Momentum Trading Losing Its Edge?

Momentum trading is simple: Buy winners, sell losers. Does it work though?

Momentum trading is all about buying stocks that are going up and selling those that are going down. It’s a simple strategy, but it can be a wild ride. When things are good, they’re great. But when the market changes direction, it can turn bad fast.

What is Momentum Trading? Think of momentum trading like following a trend. If a stock is on a winning streak, momentum traders jump in, hoping the streak continues. If a stock starts dropping, they sell it off quickly. There’s no digging into financial reports or worrying about long-term value—just following the trend.

How Does Momentum Trading Work? Well, there's two main ways to do momentum trading:

  1. Time Series Momentum: This is where you buy stocks that have been going up and sell those that have been going down.
  2. Cross-Sectional Momentum: Here, you compare stocks within the same group. You buy the ones doing the best and sell the ones doing the worst.

You can use momentum trading with more than just stocks—it works with bonds, commodities, and currencies too. Big hedge funds use fancy software to track these trends, but you can also do it through special ETFs.

The Ups and Downs of Momentum Trading: Momentum trading can be risky and exciting when the market is moving in your favor. This year, the iShares US Momentum ETF ($MTUM) is up 28% year-to-date, much higher than the S&P 500s 19%.

What Happened in July and August?

In July and August, momentum trading hit a rough patch. As market uncertainty grew, many trades that were doing well suddenly went the other way. Those betting on big tech stocks, falling bonds, and a weak yen got hit hard when the trends reversed. The $MTUM ETF, which was heavy on tech stocks like Nvidia, saw a big drop.

So, is momentum trading still a smart move, or are we getting a warning sign for something bigger?

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