By By Charlie Bilello of COMPOUND
Momentum and Mean Reversion.
The two most powerful forces in markets.
Momentum dictates that what has done the best in the past will continue to do the best and Mean Reversion just the opposite – where what is done the worst will eventually do the best, reverting back to its mean.
That both can be true is one of the great paradoxes in investing.
After the pandemic began last year, we saw one of the most epic momentum runs in history. Many of the leading stocks and sectors (particularly in technology) heading into the pandemic would see their trends accelerate to the upside when the shutdowns began in last April.
This resulted in significant outperformance among leading stocks, with the highest momentum names showing the most outperformance.
You can see this play out in the chart below, which illustrates the returns of 3 ETFs from the start of 2020 through February 12 of this year. The concentrated momentum ETF ($QMOM, 50 positions) was up 107% versus 43% for the diversified momentum ETF ($MTUM, 125 positions) and 24% for the S&P 500 ($SPY, 500 positions).
Then, without any notice, the trends stopped….. Read more