Momentum factor

The momentum factor selects stocks whose trailing 6-12 month returns have been strong (typically excluding the most recent month to avoid short-term reversal). Portfolios periodically rebalanced to hold recent winners and avoid recent losers have earned a historically robust premium over many decades and across most equity markets.

Momentum is the factor with arguably the strongest empirical support but also the most uncomfortable to explain. It violates the basic efficient-market intuition that past prices shouldn't predict future prices. The leading explanations are behavioural: investors under-react to good news initially (letting winners keep drifting up) and then over-extrapolate later (creating reversals).

Momentum has two notable practical features. First, it has high turnover — a strict momentum portfolio may rotate 100%+ annually, producing higher trading costs and tax drag than buy-and-hold value or quality portfolios. Second, it has "crash" risk: momentum portfolios can experience severe drawdowns during sharp market reversals, when yesterday's winners become tomorrow's losers in a coordinated way.