How Momentum Traders Can Prevent ‘Crashes’: A Review of 10 Stocks to Buy and 10 to Avoid
[AI Synthesis] The proposed momentum metric reduces the risk of catastrophic drawdowns by focusing on peak price behavior rather than average performance.
Key Points
- A new study in the Journal of Banking & Finance proposes a revised momentum metric that measures returns from the highest price reached over the past 12 months to one month prior, rather than the traditional 12-month return.
- This new metric significantly increases the returns of certain stocks—such as SanDisk (+3,438%) and Intel (+503%)—making them more likely to appear in the top 10 momentum stocks.
- The study found that traditional momentum strategies suffer from severe ‘crashes’—averaging 44.3% losses in the worst months—while the new method reduces average losses to just 2.4%.
- The new approach better distinguishes between stocks that are still near 52-week highs and those that have already retreated from peaks, reducing exposure during market downturns.
- The study analyzed the S&P 500 and Russell 1000 index components, identifying 10 high-momentum and 10 low-momentum stocks based on the revised metric.