Momentum screens work until precisely the moment they do not
Most rankings on this site reward recent strength. That approach has a specific, well-documented failure mode worth understanding before you use it.
Several screens here rank on momentum, 12-1 returns, distance above the 200-day average, three-month strength. It is worth being direct about when that approach breaks, because it breaks in a particular way.
What momentum actually assumes
A momentum screen encodes one bet: that what has been going up will keep going up a while longer. Empirically that holds more often than chance across most markets and most decades, which is why the factor survives.
But the mechanism is not magic. It is partly investors being slow to update, and partly investors piling into what is already working. The second half is why it fails.
The failure mode
Momentum’s worst periods are sharp reversals. When a leadership regime ends, the names that scored highest are exactly the ones that fall hardest, because crowding was the thing holding them up.
That produces an uncomfortable property: a momentum screen looks most confident right before it is most wrong. The late stage of a run and a healthy trend are numerically identical. Nothing in the arithmetic distinguishes them.
What we do about it
Not much, honestly, and pretending otherwise would be the con. Our screens confirm momentum against trend and penalise volatility, which trims the worst excesses. Neither fixes the underlying problem.
Right now the tape reads risk-on, which is the environment where momentum works best and where its eventual failure is being built. Both are true at once.
How to actually use this
Treat a momentum ranking as a description of what has been working, not a forecast that it will continue. It is a filter for attention, not a substitute for deciding what you want to own and why.
The screen has no opinion about whether a run is beginning or ending. It cannot have one. Anyone selling you a momentum screen that claims otherwise is selling you the part that does not exist.
Screenline publishes impersonal, rules-based rankings on a fixed schedule. Nothing here is tailored to your circumstances or a recommendation to buy or sell. Past performance does not predict future results.
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