Momentum StrategiesFour variants, three market caps, monthly and annual rebalance.
Cross-sectional price momentum — buying stocks that went up the most — is the strongest standalone factor we tested. We compare four academic momentum variants (Jegadeesh-Titman 12-1, 6-1, 12-2, and Novy-Marx intermediate) across three market cap levels. Then we add value exclusion filters and an MA200 regime overlay to see how far we can push it.
The Four Strategies
All strategies: buy the top 25 stocks by momentum, equal weight, hold until next rebalance. No sector exclusions (momentum is purely price-based). Universe refreshed annually from Sharadar fundamentals for market cap filter.
Results — Monthly Rebalance
| Strategy | >$200M | >$1B | >$5B | ||||||
|---|---|---|---|---|---|---|---|---|---|
| CAGR | Sharpe | DD | CAGR | Sharpe | DD | CAGR | Sharpe | DD | |
| Mom 12-1 | +5.6% | 0.33 | -67.8% | +12.4% | 0.55 | -68.6% | +13.0% | 0.61 | -64.3% |
| Mom 6-1 | +10.8% | 0.55 | -68.6% | +13.0% | 0.55 | -68.6% | +13.5% | 0.68 | -64.3% |
| Mom 12-2 | +4.8% | 0.33 | -67.8% | +13.0% | 0.55 | -68.6% | +12.2% | 0.58 | -64.3% |
| Interm (7-12) | -4.5% | 0.05 | -81.4% | +8.9% | 0.43 | -67.7% | +11.1% | 0.55 | -60.3% |
| S&P 500 | ~+8.4% CAGR · Sharpe ~0.61 | ||||||||
Market cap is the single most important filter. At >$200M, all momentum strategies except Mom 6-1 fail. At >$5B, all four beat the S&P. Small-cap "momentum" stocks include pump-and-dumps, lottery tickets, and penny stocks that spike temporarily. Large-cap momentum is cleaner — driven by genuine earnings growth and institutional flows.
Results — Annual Rebalance (12 Portfolios Averaged)
| Strategy | >$200M | >$1B | >$5B |
|---|---|---|---|
| Mom 12-1 | +4.8% | +10.8% | +12.1% |
| Mom 6-1 | +6.2% | +10.3% | +11.7% |
| Mom 12-2 | +4.8% | +10.8% | +12.2% |
| Interm (7-12) | +3.1% | +7.9% | +10.2% |
| S&P 500 | ~+8.4% CAGR | ||
Monthly rebalance outperforms annual by +1–2% at >$5B. The difference is larger at smaller market caps because fresh momentum signals matter more when the universe includes volatile small stocks. At >$5B, annual rebalance is nearly as effective — large-cap momentum trends persist longer.
Pushing Further: Value Exclusion Filters
Instead of combining value and momentum into a composite (like Trending Value), we take the opposite approach: use momentum as the primary signal but exclude stocks from the worst value deciles. This removes the most overvalued momentum stocks — the ones most likely to be speculative bubbles.
| Strategy (>$5B) | CAGR | Sharpe | Max DD |
|---|---|---|---|
| Pure Mom (10) | +17.1% | 0.70 | -59.2% |
| Excl top P/S (10) | +18.1% | 0.78 | -57.0% |
| Excl P/S+SY (10) | +16.7% | 0.76 | -58.5% |
| Excl ALL+MA200 (10) | +14.0% | 0.81 | -29.6% |
| Pure Mom (25) | +13.5% | 0.68 | -57.1% |
| Excl P/S+SY+MA200 (25) | +12.5% | 0.87 | -27.7% |
Excluding the most expensive P/S decile adds +1% CAGR (17.1% → 18.1%) with 10 stocks. The MA200 overlay cuts drawdowns dramatically (−57% → −28%) but reduces CAGR. The best risk-adjusted: Excl P/S+SY+MA200 (25 stocks): Sharpe 0.87, DD −27.7%.
Seasonality
Momentum shows the opposite seasonality to value. Value works best in January (tax-loss selling recovery). Momentum works best in September–November — the strongest months for trend continuation before year-end.
Key Findings
1. Mom 6-1 is the best variant with monthly rebalance
Shorter lookback captures more recent trends. With monthly rebalancing, you can act on the latest 6 months of price action. The 12-month variants are better with annual rebalance where stale data matters less.
2. Market cap >$5B is essential
Below $1B, momentum is noise. Above $5B, it captures real institutional flows and earnings-driven price appreciation.
3. The MA200 overlay is the best risk management tool
When the S&P 500 is below its 200-day moving average, go to cash. This avoids the worst momentum crashes (2008, 2020 March) and cuts max drawdown by 20–30 percentage points. Cost: ~1–2% CAGR and 53 months in cash over 20 years.
4. Value exclusion filters improve quality
Removing the most expensive stocks by P/S eliminates the most speculative momentum names. Combined with MA200, this produces a Sharpe ratio of 0.87 — the best risk-adjusted return we found in any strategy.
5. Concentration amplifies everything
10 stocks: +17–18% CAGR but −57% max drawdown. 25 stocks: +13% CAGR but manageable volatility. Choose based on your risk tolerance.