Momentum: The Mother Force Behind Market Trends

Momentum is the tendency for winning stocks to continue winning and losing stocks to continue losing, yet it remains one of the most persistent and puzzling anomalies in financial markets. Across decades, asset classes, and geographies, data has shown that price trends don’t appear randomly; they endure. But why does momentum continue to work, even in an era of high-frequency trading and AI-driven markets?

Researchers have identified key forces – behavioural biases and structural or institutional frictions that keep momentum alive in markets.

The Psychology Behind Momentum

Markets move not just on numbers but on human behaviour.
Biases like underreaction, herding, and overconfidence create trends that tend to reinforce over time.

• Underreaction to Information

When Trent Ltd. (the Tata Group’s retail arm) began posting consistent double-digit same-store sales growth after COVID, the market initially responded cautiously. But as the performance repeated quarter after quarter, more participants started pricing in its structural story. According to The Economic Times, Trent has delivered over 500% cumulative return in the past five years, while Screener.in reports a 67% CAGR in profit growth over the same period. As of November 2025, the stock trades in the ₹4,300–₹4,600 range on NSE India.


This is a classic textbook example of underreaction, where prices adjust naturally as fundamentals improve.

• Herding and Trend Following

When sectors start moving, money often chases performance.

Take defence stocks in India – HAL, Bharat Dynamics, and Mazagon Dock. Once the government’s indigenisation drive became evident, FII and domestic mutual fund flows poured in. As more funds joined the trend, prices kept rising far beyond their initial fair values.


This is herding at scale, a feedback loop where every rise attracts more capital.

• Overconfidence and Confirmation Bias

Momentum also thrives because investors tend to stick to their beliefs.

In 2021, many investors held on to Zomato or Nykaa even as valuations soared, convinced that “India’s consumption story” justified it. Similarly, during downcycles, investors hold onto losing names, hoping for a rebound, which sustains downward trends longer than fundamentals warrant.


This behavioural inertia adds fuel to the momentum in both directions.

The Market Structure Advantage

Even if everyone were rational, market structure itself prevents instant price discovery.

• Slow-Moving Capital

Large funds can’t flip their portfolios overnight.

For instance, during the September 2025 quarter, foreign institutional investors (FIIs) quietly increased their holdings across most major state-run banks, including State Bank of India, Bank of Baroda and Canara Bank, signalling renewed confidence in the segment. This gradual re-allocation of capital helps sustain upward momentum in these stocks.

• Market Frictions and Constraints

In small- and mid-cap segments, liquidity is thin and transaction costs are high.

According to SEBI disclosures, some small-cap funds require up to 11 days to liquidate 25% of their portfolio, indicating that large or rapid position changes are difficult in less liquid stocks. This structural lag can help sustain price trends since capital takes time to enter or exit the trade.

• Feedback Trading

Momentum may also be amplified by algorithmic or quant-driven strategies.

For example, when a stock like Polycab India shows a strong quarterly beat (net profit +56 % YoY) and a surge in open interest, algorithmic strategies typically step in, adding to the buying intensity.

The science behind momentum?

Momentum works not because of one cause, but a combination of psychology, structure, and risk. These forces collectively delay the full absorption of information, allowing price trends to strengthen and persist far beyond initial expectations.

The Discipline Behind Momentum

Momentum persists not because markets are irrational but because they are human.

The essence of momentum remains unchanged, a rules-based approach rooted in evidence and human behaviour. Periods of underperformance, like those seen in 2025, do not mark the end of momentum investing; rather, they serve as reminders that every enduring strategy faces phases where conviction is tested.

“Momentum doesn’t promise smooth sailing; it promises long-term reward for those who stay the course.”

For investors guided by process, these challenging phases are not setbacks but the very foundation of future outperformance. As markets cycle and narratives shift, trends will re-emerge, and those who stay systematic will be best positioned to capture them.