Industry Momentum, Momentum Behavior and Market States: An analysis of different momentum sources under different market states

Abstract

Momentum strategies have proved to be very profitable and widely used among investors. Despite this, research has found that they can also experience substantial losses. This thesis focus on studying momentum behavior from different sources under different market states. Exploring over 40 years of data (1980 - 2021) from the US stock market, we find that industry momentum does not suffer the same magnitude of momentum crashes. Further, we find an abnormally high level of momentum returns under the Covid period, not matched by any previous periods in our data set. When studying individual stock momentum within industries, we find market return and market capitalization to be the key drivers behind momentum return. These fail under periods when momentum crashes occur, and they also fail under the Covid period. Lastly, we propose a set of new momentum trading strategies aimed to prevent significant losses under momentum crashes.