Momentum Crash

Momentum is the tendency of a security to continue its movement in a particular direction. Momentum crash is basically the sudden reversal of a prevailing trend in the market.

In April 2011, Kent Daniel published the research paper called Momentum Crashes which investigated this phenomenon. He discovered that there have been several periods in the past during which the momentum strategy dramatically crashed, most notably between March 2009 and  December 2009 and the period from 1932 to the end of World War II. He observed that normally the portfolio with “winner stocks” (top 10% stocks with the strongest previous 12 month performance) outperforms the portfolio with “loser stocks” (bottom 10% stocks with the weakest previous 12 month performance), but during a momentum crash the loser portfolio outperforms the winner portfolio.