Momentum trading has changed the rules

Momentum trading is now dominating markets, sidelining fundamentals and forcing investors to confront how trends really drive share prices.

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Momentum trading has come to dominate stock markets.

MOMO is short for momentum. It is the idea that algorithm-driven computer trading is now very large and is latching onto, perpetuating, and extending rallies in particular stocks and themes. It is basically the idea that traditional, fundamental research-based investing is being overrun by computer trading, which is more interested in exploiting investors’ behavioural traits than in considering the fundamental quality of stocks.

So what goes up keeps going up. And when a trend ends, a stock or theme is suddenly, rather than gradually, deserted.

The obvious example was last year, when Commonwealth Bank (ASX: CBA) peaked and BHP (ASX: BHP) bottomed pretty much on the same day. And that switch is still in place (banks in the doldrums, resources flying).

 

What MOMO actually means

MOMO is simply market shorthand for momentum trading – buying what’s already going up and selling what’s already going down. No mystery, just human behaviour wrapped in a ticker-room nickname.

• MOMO traders assume price trend beats valuation.
• They don’t care what something is “worth”, only whether other people are buying it.
• Profits come from riding the wave before it breaks, not from owning quality forever.

 

How MOMO trading works

• Focus on price action, volume, and relative strength, not balance sheets.
• Buy breakouts to new highs, sell breakdowns to new lows.
• Timeframes are short – days to weeks, sometimes minutes.
• Stops are tight because when momentum dies, it dies brutally.

 

Typical MOMO signals

• Stock making 52-week highs on rising volume.
• RSI / MACD confirming acceleration.
• Earnings surprise that triggers a crowd chase.
• ETF flows all running one way (think AI in 2023–24).

 

The appeal – and the danger

• You’re aligned with the crowd and liquidity.
• Big trends can deliver outsized returns quickly.
• Works well in bull markets and thematic manias.

 

• No margin of safety – it’s musical chairs.
• Reversals are savage; the last buyer holds the baby.
• Requires discipline that most investors don’t have.

MOMO = “I don’t care why it’s going up, only that it is going up – and I’ll get off before everyone else does.”

Used on trading desks: “The MOMO names are running.” “Tech lost MOMO.” “It’s a pure MOMO trade, no fundamentals.”

 

When fundamentals stop mattering

We all look to the newswires every day for excuses for share price and market movements, but if MOMO is going to continue to dominate, the suggestion is that fund managers would be better to chase momentum and ignore fundamentals. To invest on the back of chart signals whilst ignoring fundamentals.

Net result, traditional research becomes pointless, and to be successful, you need to be all over volumes and trends (charts). You also need to be prepared to trade and be short-term.

 

MOMO moves in themes

MOMO works in themes rather than stocks. The stocks get caught up, obviously, but the thematic dominates.

Last year, one MOMO trade was out of banks and into resources. Not out of CBA into BHP. Another theme was out of Big Tech (FANG). A new one is the switch into small caps (Russell 200 in the US).

And we have seen MOMO touch uranium, critical minerals (in and out and getting back in now), lithium, and iron ore. MOMO can be triggered by surprises that turn heads – like results, macro events, takeovers, media, and shorting.

 

Rotation, not retreat

MOMO trading money switches around. It has to have somewhere to go, and rather than just bugger off at the top of a trend, it moves – it doesn’t just sell Australian banks, it has to buy Australian resources.

It doesn’t just lose interest in Big Tech; it finds something else to trend. It sells the Magnificent 7 and buys the non-so-magnificent 493. It rotates.

MOMO and the lack of fundamental support for some thematic trends prompted an article this week in the Financial Times about an impending 1929 event. But whatever.

 

So what do you do with MOMO?

Do you have to become a momentum trader as well? Chase trends until they end? Desert fundamental analysis?

Looks like it. At the moment. That seems to be what everyone has come back and done in the last two weeks. Just ripped into the sectors that were already running.

So we have to decide whether to join in (FOMO) or not. So far, not. I am more worried about FOCO (the fear of getting caught out) than FOMO.

 

How we’re thinking about it

In the Strategy Portfolio, we can only invest in Australian ETFs. My response is to deep dive into ETFs – as you will see with our new ETF SNAPSHOT service. We can now unpack an ETF.

Our skill set up to now has been having the balls and decisiveness to cash out of ‘the market’ sometimes. With ETFs, we could extend that skill set to cash in and out of themes. But it would mean being short-term, ignoring common-sense fundamentals, and respecting technical turning points rather than fundamental and macro analysis.

It would mean increasing our risk profile.

I’m not sure you want that. Not in the Strategy Portfolio anyway. I know our investors in MT20, which includes my super, don’t want to dive into overpriced stocks and sectors just because they are trending higher at the moment.

But it all feeds into the equation. MOMO is here, and it’s huge, and rather than reject it, you (and we) have to exploit it. It’s creating opportunity, which is good. We like that. But it’s also creating risk.

We have to balance the two. So far, we remain cautious. There will be plenty of trend changes to exploit this year, but buying expensive stocks just because they are going up is not in the game plan. Taking advantage of momentum traders, now is. Good game.