Trended Momentum

Charlie Xiaowu Cai, Peng Li, and Kevin Keasey

♦ Drawing on cognitive psychology and behavioral theories of pattern recognition and heuristic processing, we offer a new perspective on momentum by highlighting how clear price trends shape investor expectations. Trend clarity materially strengthens momentum returns: the highest trend-clarity quintile earns annualized returns of 12.68%, compared with 6.90% for a conventional momentum strategy. We also show that trend clarity affects momentum trading intensity within Hong and Stein’s (1999) multi-period return-chasing model. Additional tests indicate that trading on clear trends is a central feature of momentum, distinct from existing explanations and observable across asset classes and global markets.

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