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Our thoughts on the rally in momentum stocks

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Momentum is an equity risk factor which buys winners and sells losers within an index. It is systematic and has no considerations for earnings, valuation or other fundamental metrics such as dividends. 

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Our thoughts on the rally in momentum stocks

Historically, it has delivered outstanding returns, causing headaches for advocates of the Efficient Markets Hypothesis (EMH). Its persistence actually breaks one fundamental rule of the EMH: if past stock prices help predict future returns, they do not fully reflect all available information. Research on the causes of momentum persistence was popularized by Hong and Stein in 1999 (“A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets”).