Surreal illustration of a rollercoaster representing market cycles, symbolizing momentum investing.

Decoding the Market: How Momentum Investing Can Work for You

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Soraya Malik in Business & Economy August 2025 • 4 min read.

"Unlock strategies to navigate market cycles and rebounds, turning potential pitfalls into profit opportunities, and build a well rounded portfolio."


The financial markets are a constant whirlwind of activity, with trends emerging and disappearing in the blink of an eye. One strategy that has captured the attention of investors is momentum investing. It's the idea of riding the wave of rising asset prices, but recent evidence suggests that this strategy isn't without its challenges. In times of volatile market recoveries, momentum strategies can suffer significant losses, raising questions about their reliability. Recent research dives deep into the performance of momentum strategies, particularly in the German stock market, offering valuable insights for investors looking to navigate these tricky waters.

This article breaks down the key findings of a recent study to explore the nuances of momentum investing. We will delve into how these strategies behave during different market states, from bullish runs to bearish downturns, and, most importantly, during those unpredictable rebound periods. With a focus on both price and earnings momentum, this analysis provides a practical guide to understanding the risks and rewards of this popular investment approach.

Whether you're a seasoned investor or just starting to explore the world of finance, understanding the dynamics of momentum investing is crucial. Learn how to make informed decisions, avoid potential pitfalls, and position yourself for success in any market environment. Let's get started!

Momentum Investing: Riding the Wave or Heading for a Crash?

Surreal illustration of a rollercoaster representing market cycles, symbolizing momentum investing.

Momentum investing is a strategy based on the idea that assets that have performed well in the past will continue to perform well in the short term. Investors identify stocks or other assets that are trending upward and buy them, hoping to profit from the continuation of the trend. However, this strategy can be vulnerable during market reversals, when previously high-performing assets suddenly lose steam and crash.

A recent study focused on the German stock market sheds light on this phenomenon. The researchers found that during market rebounds – those periods of rapid recovery after a downturn – long-short price momentum strategies can lose a substantial amount each month. This "momentum crash" is primarily due to the behavior of recovering loser stocks. After a prolonged bear market, these stocks, often composed of highly volatile and leveraged small-cap companies, are prone to significant rebounds, negating the potential gains from the strategy.

Key Findings of the German Stock Market Study:
  • Momentum crashes can lead to substantial losses.
  • Loser stocks often drive momentum crashes during market rebounds.
  • Market rebounds can especially hurt loser stocks.
One of the most interesting findings is that the momentum crash phenomenon appears to diminish when controlling for exposures to Fama-French factors, particularly the market factor. This suggests that the crash is related to broader market dynamics rather than solely to the characteristics of individual stocks. Furthermore, earnings momentum strategies, which focus on stocks with positive earnings revisions, are less affected by market rebounds and tend to outperform price momentum strategies on a risk-adjusted basis.

Navigating the Momentum Maze

Momentum investing can be a powerful tool, but it requires a deep understanding of market dynamics and risk management. By recognizing the potential for momentum crashes, particularly during market rebounds, investors can take steps to protect their portfolios. Diversifying strategies, considering earnings momentum in addition to price momentum, and closely monitoring market factors can all help to mitigate risk and improve the overall performance of a momentum-based investment approach. Stay informed, stay vigilant, and navigate the markets with confidence!

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: 10.2139/ssrn.2348072, Alternate LINK

Title: Momentum Profits, Market Cycles, And Rebounds: Evidence From Germany

Journal: SSRN Electronic Journal

Publisher: Elsevier BV

Authors: Martin T. Bohl, Marc-Gregor Czaja, Philipp Kaufmann

Published: 2013-01-01

Everything You Need To Know

1

What is momentum investing and how does it work?

Momentum investing is a strategy where investors buy assets that have performed well recently, expecting the trend to continue. The idea is to 'ride the wave' of rising prices. However, it's vulnerable during market reversals when high-performing assets suddenly decline. This strategy relies on identifying stocks or assets trending upward and capitalizing on their continued rise.

2

What is a 'momentum crash' and when does it typically occur?

A 'momentum crash' happens when momentum strategies experience significant losses, especially during market rebounds after downturns. Loser stocks, often volatile small-cap companies, tend to rebound sharply during these periods, offsetting gains from other assets. The recent study found that long-short price momentum strategies in the German stock market can lose a substantial amount each month during market rebounds.

3

What were the key findings of the German stock market study regarding momentum investing?

The German stock market study revealed that during market rebounds, long-short price momentum strategies can suffer substantial losses due to the behavior of recovering loser stocks. These rebounds negate potential gains. However, the study also found that controlling for Fama-French factors, particularly the market factor, diminishes the crash phenomenon, suggesting broader market dynamics play a role. Earnings momentum strategies, focusing on earnings revisions, are less affected and outperform price momentum on a risk-adjusted basis.

4

How can investors protect their portfolios from momentum crashes?

Investors can mitigate the risks of momentum crashes by diversifying their strategies, considering earnings momentum alongside price momentum, and closely monitoring market factors. It is important to stay informed and aware of market dynamics, especially during volatile periods. Another approach is to adjust exposures to Fama-French factors, particularly the market factor.

5

How does earnings momentum compare to price momentum, and why might it be a better approach?

Earnings momentum focuses on stocks with positive earnings revisions, making it less susceptible to market rebounds compared to price momentum strategies. The recent study suggests that earnings momentum strategies tend to outperform price momentum strategies on a risk-adjusted basis. By focusing on stocks with improving earnings, investors can potentially avoid some of the pitfalls associated with relying solely on price trends. While this strategy is highlighted, the article doesn't mention the impact of accounting standards when evaluating earnings revisions, which should be considered for a full picture.

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