The Momentum Factor

Momentum is the most counterintuitive factor in systematic investing. It says: own the stocks that have gone up a lot recently, because they tend to keep going up for a while. Avoid the ones that have gone down a lot, because they tend to keep falling.

Everything about this feels wrong to anyone trained on value. You buy high and hope to sell higher. You chase performance. You do exactly what the textbooks tell you not to do.

And yet momentum is one of the best documented return patterns in financial history. It has shown up in the US, Europe, Japan and India, and it has kept showing up since Jegadeesh and Titman documented it in 1993. It is also the engine of most of the RupeeCase lineup, which is why I want you to understand both why it works and exactly how it fails. Because it does fail, hard, and the two years to October 2026 were one of those stretches.

The evidence: what Jegadeesh and Titman found

In 1993, Narasimhan Jegadeesh and Sheridan Titman published "Returns to Buying Winners and Selling Losers" in the Journal of Finance. Their finding: US stocks that did well over the past 3 to 12 months kept outperforming over the next 3 to 12 months, and the losers kept losing. The winners beat the losers by roughly 1% a month over the following six months. That is not a rounding error.

It was replicated widely. Rouwenhorst (1998) found it in 12 European countries. Carhart (1997) added it to the standard fund evaluation model. Asness, Moskowitz and Pedersen (2013) found it in "Value and Momentum Everywhere", across equities, bonds, currencies and commodities.

Why momentum exists: three explanations

1. Underreaction to news

Markets do not price new information all at once. When a company reports strong results, the stock rises, but not straight to its new fair value. Investors anchor to the old price, adjust slowly, and the stock keeps drifting up for weeks and months as the news sinks in. Momentum captures that slow repricing.

2. Investor herding

As a stock rises it attracts coverage, upgrades and attention. That feeds itself: price up, more attention, more buying, price up again. The cycle does not reverse until sentiment breaks, and sentiment tends to break suddenly. That is why momentum crashes are sharp.

3. Trend following institutional behaviour

Many institutions follow trends on purpose, and index funds and ETFs now track momentum indices too. Their buying reinforces existing trends. As that money has grown, it may itself sustain part of the effect, and it can also crowd the trade, which makes the exits more violent.

How to measure momentum correctly

This is where most do it yourself momentum goes wrong. The standard academic signal is:

Skipping the last month matters. The latest month's return tends to reverse, not continue: the short term reversal effect (Jegadeesh, 1990). Include it and you are partly betting on the wrong thing.

NSE's own momentum indices use a refinement worth knowing. The Nifty200 Momentum 30 takes each stock's 6 month and 12 month returns, divides each by the stock's volatility, turns them into z scores against the universe, and averages the two. The top 30 are weighted by free float market cap times that score, capped at 5% a stock, and the index is rebalanced every June and December. Dividing by volatility rewards a steady climb over a wild spike, which is a quiet defence against the crashes below.

Momentum in Indian markets: the specific evidence

NSE publishes several momentum indices: the Nifty200 Momentum 30 (launched August 2020), the Nifty Midcap150 Momentum 50 (August 2022), the Nifty500 Momentum 50 and the Nifty Alpha 50, which ranks on a related measure of excess return. Their factsheets tell a consistent story: a large long run edge over the parent universe, with more volatility and deeper falls.

A few India specific observations from that data:

• Momentum has been stronger further down the size ladder. The Nifty Midcap150 Momentum 50 earned 22.2% a year on total return since 2005 against 18.3% for the large and mid cap Nifty200 Momentum 30, with similar five year volatility (19.1% against 19.4%).
• Sector concentration is a known issue. In strong sector rallies, momentum portfolios can pile into one or two sectors. That is a side effect of the rule, not a design goal, and it needs watching.
• Faster rebalancing is not free. Fresher rankings help momentum, but every extra rebalance costs STT, stamp duty and fees. The cadence has to be tested net of costs.

The momentum crash: when it fails

Momentum is the factor most prone to sudden failure. When the market turns sharply, the portfolio is full of the old winners, which often fall hardest, and holds none of the old losers, which often bounce first.

You do not need a textbook case. Watch the last two years.

Read the chart slowly. Between October 2024 and April 2025 the momentum index lost about 30% while the Nifty 500 lost about 14%. The rebound came, but momentum never caught up: two years on it was still 21.5% down, while value, the factor nobody wanted in 2020, was slightly up. Same market, same two years. This is what a momentum drawdown feels like from the inside, and it is why I never hold momentum alone.

The three conditions that produce a momentum crash:

• High market volatility: when India VIX spikes, recent winners tend to be the most crowded and the most exposed to forced selling
• Sharp market reversal: momentum needs trends to persist. A sharp turn kills the trend before it can be captured
• High dispersion of past returns: when the gap between winners and losers is very wide, the crash, when it comes, is correspondingly wide

This is why combining momentum with other factors, especially low volatility, quality and value, matters so much. They tend to hold up when momentum breaks. Module 3.6 shows how to combine them.

Momentum variants worth knowing

A worked example: reading a momentum rebalance

Say a 50 stock momentum strategy rebalances. Its ranking now puts 9 of its current holdings outside the top 50, and 9 new names inside. The rebalance sells the 9 and buys the 9, leaving the other 41 untouched apart from bringing each back to an equal 2%. If the portfolio is ₹5 lakh, about 18% of it, ₹90,000, is sold and the same bought: ₹1.8 lakh of traded value. At the RupeeCase fee of 0.2% that is ₹360, plus STT of ₹180 and the usual small charges.

Now picture the same strategy during the April 2025 reversal. Turnover jumps, because last quarter's winners collapse out of the ranking at once. That is the momentum crash showing up in your contract notes: more trading, at worse prices, exactly when it hurts. Knowing this in advance is half of holding through it.

Common mistakes with momentum

How this shows up in RupeeCase

Most of the RupeeCase lineup is momentum, run as rules you can read. Allcap ranks the Nifty Total Market, about 750 stocks with a share price under ₹5,000, holds the top 50 at equal weight and rotates every two weeks. Midcap, Smallcap and Microcap apply the same idea to narrower universes. Allcap Multi Asset wraps the same momentum sleeve with 10% debt and 10% gold to soften the crashes described above. Each page shows the model, back tested history and its worst drawdowns, so you see the bad stretches before you invest.