How Momentum Traders Can Prevent ‘Crashes’: A Review of 10 Stocks to Buy and 10 to Avoid

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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.

[AI Synthesis] The proposed momentum metric reduces the risk of catastrophic drawdowns by focusing on peak price behavior rather than average performance.
[AI Synthesis] Stocks like SanDisk, Western Digital, and Intel show extreme positive momentum under the new metric, suggesting high volatility and potential overvaluation risks.
[AI Synthesis] Low-momentum stocks such as SLM, Omron, and Disney show minimal or no growth, indicating potential for stagnation or weakness in growth expectations.
[AI Synthesis] The study highlights a critical risk in momentum investing: the potential for ‘momentum crashes’ when the market reverts to mean or sentiment shifts rapidly.

Revising momentum to track peak prices instead of average returns reduces the risk of sudden drawdowns.
High-momentum stocks (e.g., SanDisk, Intel) may be overvalued and vulnerable to correction.
Low-momentum stocks (e.g., SLM, Disney) show minimal growth and may represent safe-harbor or defensive holdings.
Investors should assess the underlying fundamentals and sentiment behind peak price movements before acting on momentum signals.

Topics: Finance: Momentum Trading Risk Prevention
Tags: momentum-trading investment-risk crash-prevention stock-selection