Part B · Chapter 8 of 9 · 5 min read
Trends and Momentum
Why two investments with the exact same return can have completely different trend quality, why academic research backs Momentum, and how to spot persistent trends across any horizon.
It is a familiar experience for almost every investor: you read an article about how a stock like NVIDIA has risen by more than 1,200% over the last five years, or how a quiet industrial compounder like Cintas or Costco has steadily doubled and tripled, and you wonder how you missed the trend while it was happening.
The truth is that it is impossible to track what is genuinely trending across thousands of stocks and ETFs by eye, and raw percentage return alone cannot tell you whether an asset is in a steady uptrend today or merely coasting on a spike from years ago.
What Makes a True Trend Metric (TrendScore)
To solve this problem quantitatively, we need a trend metric that evaluates the entire price path rather than just the start and end prices. A well-designed quantitative TrendScore (measured in EasyCompare via our ATH/ATL Trend and path-consistency metrics) captures four key properties of an asset's return series:
- Consistency: Are the returns accumulating steadily period after period, or did all the gains happen in one erratic burst?
- Low Path Volatility: How smooth is the trajectory? A steady upward climb earns a significantly higher trend score than a rollercoaster path that ends at the same final price.
- Recency & Peak Proximity: Does the uptrend still hold in recent periods, or did the asset peak years ago and spend the rest of the window in a deep slump?
- Adaptability Across Time Horizons: Whether you are evaluating a 3-month tactical window, a 1-year trend, or a 5-year structural compounder, a normalized trend score lets you compare assets on an equal footing.
The Academic Evidence Behind Momentum
At its core, momentum investing is built on the empirical finding that assets performing strongly and consistently over recent medium-term horizons tend to continue outperforming for a meaningful period, while persistently weak assets tend to keep lagging.
Why Trends Continue
Assets that establish a consistent upward or downward trend tend to persist in that direction longer than random walk models would suggest. Financial economists attribute this to both behavioral factors (investors initially under-reacting to fundamental shifts and later herding as institutional adoption grows) and gradual diffusion of business fundamentals.
Decades of Peer-Reviewed Research
Extensive academic research confirms that momentum is one of the strongest, most pervasive factors in finance. Asness, Moskowitz, and Pedersen (2013)1 demonstrated consistent momentum premia across global equity markets, industries, government bonds, currencies, and commodities. In cryptocurrencies, Liu and Tsyvinski (2018)2 similarly documented a strong time-series momentum effect.
How to Use Trend Metrics in Your Investing
Usually, when an asset trends steadily upward over months or years, there is a real fundamental engine driving it. Combining quantitative trend detection with your own fundamental research and risk checks unlocks three practical workflows:
- Spot Emerging Trends Before FOMO Sets In: Instead of hearing about a winner only after it makes front-page news, you can compare 3-month, 6-month, and 1-year trend and Sharpe profiles in EasyCompare or BetterThanSPY to identify steady leaders early.
- Uncover Quiet Long-Term Compounders: Market noise often drowns out steady 3-year and 5-year compounders in healthcare, industrials, retail, or insurance (such as Eli Lilly, Cintas, Costco, or Berkshire Hathaway) that post high TrendScores and Sharpe Ratios above 0.95.
- Detect When a Former Winner Has Lost Its Edge: By checking shorter horizons (such as 3M, 6M, and 1Y) alongside 5Y history, you can quickly see whether a long-term winner is still trending positively today or has rolled over into a deep drawdown.