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The momentum approach — formally defined as buying stocks that have performed well over the previous three to 12 months, then selling those that have lagged over the same time period — has outperformed all other styles in the US in 2019, and on a long-short basis is up 11%. It's been an undeniable success., is starting to see cracks developing in the landscape — and she thinks it's setting up a perfect short.
The continuation of the aforementioned macro backdrop is key here. Remember, momentum investors pour into the issues that are already in an established trend, so they rely upon the past to extrapolate into the future. This reinforces McCarthy's view that the outperformance in the momentum factor is largely due to the decline in US Treasury yields. It also leads her to believe that this cohort of stocks is running on fumes, putting upward pressure on valuations.
With all of that established, McCarthy goes on to demonstrate just what will set her trade's wheels in motion.