Summary
- Momentum signals are turning negative across the market, especially in technology and semiconductors, after the longest positive momentum signals since January 2020.
- Staying disciplined and reacting to changing signals is critical; relying solely on buy-and-hold can expose investors to significant drawdowns during sector rotations.
- Key indicators, including my proprietary momentum gauges, have shifted to negative, prompting a move to cash and hedges in my portfolios.
- Timing matters is critical – leveraging proven models and adapting to new data can help investors outperform and avoid behavioral pitfalls.
- As Q2 earnings continue, the record volatility could rise again, as we have seen more +/- 2% daily moves in 2025 than in all of 2024 and 2023 combined.
Introduction
“What is most important isn’t knowing the future – it is knowing how to react appropriately to the information available at each point in time.” ~ Ray Dalio
So then…
Why aren’t momentum strategies exploited by all smart investors and arbitraged away?
- Investors will continue to suffer behavioral bias.
- Investors who delegate [their investments] will look for short-sighted performance chasers who are compelled to deliver immediate results.
- The ability to stay disciplined to a process is arguably the most important aspect of being a successful investor.” ~ Gray, W., & Vogel, J. (2016)
Timing matters, and it matters greatly. I have spent the last 35 years trading, researching, and constructing algorithms to identify and leverage the value across fundamental, technical, and behavioral finance models. Of the ten portfolio models designed for optimal portfolio mixes for members to beat the market at Value & Momentum Breakouts, eight come from enhancing well-tested anomaly research in published financial journals.
If you believe, like I do, that there is much more to stock trading than just buy, hold, and hope that every future event works out perfectly as promised for your stock, then these trading models are for you. This article highlights some key changes in stock, sector, and market signals that may benefit your trading decisions. I am certain again this year that we will see more rotation, and if you are just riding the buy and hold approach, you can find yourself in a painful situation.
Key Momentum Signals Turning Negative
This article follows up on my prior cautions in July of cyclical pullbacks and much higher volatility in the months from August to October. Back in May when we were getting many positive buy signals we noticed that fund manager’s flows were at the lowest levels in 2 years. Now as we enter August these fund manager inflows have pushed indices to all time highs.
