The stock market can be a wild place. Prices swing far more than they “should”, and that excess volatility has baffled academics for decades, and my portfolio for the last week.
If you’re serious about investing, you have to understand how prices really behave. Price movements can be quite random, but they do often repeat in patterns - and some of the most powerful are the patterns of momentum.
In simple terms, momentum is the idea that winners keep winning and losers keep losing. But as we’re hard-wired to seek bargains, we normally reject the idea completely. That’s a mistake.
Momentum is the most powerful return driver of all - and completely beats value investing across most timeframes. But there are some nuances to how momentum behaves across timeframes, which can trip you up if you don’t know they exist.
So let’s dive into some details.
Phase 1: Short-Term Reversals (1 week to 1 month)
In the short term, prices tend to reverse.
A share that’s surged for a few weeks will often pull back, while one that’s fallen too far tends to bounce. This is called the short-term reversal effect. It’s especially common in choppy markets, and it can be very frustrating.
Yesterday, we saw a really nasty reversal in the gold and silver prices after a very strong recent run, and all the precious metal mining stocks fell 10% in tandem.
Prices often pull right back to stop-loss levels, so you can end up selling at trend lows, only to see the share whip back up again without you. Or you might think you’ve timed a breakout to perfection - only to see it stall. Deeply frustrating, but so often expected.
But, there is an exception to this rule.
When a company releases genuinely new, material news - say an “ahead of expectations” trading statement or a transformational contract - like Goodwin (LON:GDWN) recently or Filtronic (LON:FTC) after its SpaceX contract last year - the price often jumps and keeps drifting in the same direction.
These aren’t liquidity or sentiment-driven moves, they’re the market digesting new information. The former often reverse, while the latter often spark new trends.
That’s why staying on top of news matters. It’s often the trigger that flips a stock from short-term moves into the next phase - mid-range momentum.
