Why Momentum Investing Has Been Struggling-And What Volatility Has to Do With It

The article “Why Momentum Investing Has Been Struggling-And What Volatility Has to Do With It” was originally published on Alpha Architect blog.

A look at recent academic research connecting market volatility spikes to the underperformance of momentum strategies (especially for long/short versions of the strategy)

The Big Picture

If you’ve used momentum as part of your investment strategy over the past decade and found it disappointing, you’re not imagining things. Haim Mozes, author of the study “Volatility Spikes and Momentum,” published in the Spring 2026 issue of The Journal of Beta Investment Strategies, investigated the relationship between volatility spikes—sudden, sharp jumps in the VIX, Wall Street’s so-called “fear gauge”—and the performance of momentum investing.

Mozes analyzed over 30 years of market data, spanning 1994 to 2024, broken into three roughly equal periods: 1994–2003, 2004–2013, and 2014–2024. Each period captures one of the major volatility events of the past three decades—the NASDAQ crash and 9/11, the global financial crisis, and the COVID-19 pandemic.

His core question was: How do volatility spikes interact with momentum investing, and has that relationship changed over time?

To answer this, the paper tracked:

• Volatility spike frequency—how often the VIX (a measure of expected market volatility) jumped well above its recent average, using several definitions of “spike” ranging from 1.25x to 2x the VIX’s moving average
• Spike reversal speed—how quickly the VIX came back down after a spike
• S&P 500 returns before, during, and after those spikes
• Momentum factor returns during months with spikes versus months without them

Key Findings

1. Volatility Spikes Are Happening More Often—And Reversing Faster

This is perhaps the most important finding of the paper. In the most recent decade (2014–2024), volatility spikes occurred far more frequently than in earlier periods. For example, using a moderate definition of a spike (VIX reaching 1.5x its three-month moving average), there were just 7 spikes in the 2004–2013 period but 22 in the 2014–2024 period.

Mozes hypothesized that possible explanations for why momentum has not been working are that : “a) the increasingly rapid pace of technological change; b) the increasing polarization of the political process, which leads to more numerous disruptive legislative proposals and agency interpretations/rule making, c) the increasing ability of social media to amplify events, and d) the proliferation of highly leveraged investment vehicles and funds, which bring with them inevitable forced deleveraging episodes.”

Mozes also found that when spikes did occur, they were resolved more quickly. Under that same 1.5x definition, spikes took an average of 54 trading days to reverse in earlier periods, compared to just 28 days in the most recent decade.

The research suggests this faster recovery reflects greater market efficiency—markets are now quicker to process new information and reach a consensus, potentially driven by the rise of high-frequency trading, algorithmic strategies, and hedge fund activity. The more quickly information gets priced, the faster uncertainty (and therefore volatility) dissipates.

2. A Clear Stock Pattern Around Volatility Spikes: Down First, Then Up

The data show a consistent pattern in how stocks behave around volatility spikes:

• Before the spike: The S&P 500 tends to fall meaningfully. In the 2014–2024 period, the average market return in the month before a moderate volatility spike was approximately -3.8%. For larger spikes (VIX reaching 2x its moving average), that prior-month loss deepened to around       -8.4% to -8.9%.
• During the reversal: Once the spike occurs and starts reversing, the S&P 500 has tended to post strong positive returns. In the most recent period, average returns during the reversal window ranged from about 1.5% to over 7%, depending on how large the spike was.

In other words, volatility spikes look like concentrated moments of fear and uncertainty, followed by a rapid normalization as the market digests whatever caused the spike.

3. Momentum Strategies Get “Chopped Up” Around Volatility Spikes

This is where the paper’s most actionable findings come in. Momentum investing—the strategy of buying stocks (or markets) that have been performing well and selling those that have been performing poorly—depends on trends persisting. When the market falls sharply and then immediately reverses, momentum strategies get caught on the wrong side.

Here’s the mechanism:

• A volatility spike typically coincides with a sharp market decline. Momentum strategies interpret this as a signal to be cautious or to go short.
• But the quick reversal of the spike triggers a sharp market rebound—exactly the opposite of what the momentum strategy had positioned for.
• The more frequently this cycle of spike-and-reversal occurs, the more often momentum strategies get whipsawed.

The data back this up. Across the full 1994–2024 sample, the average monthly momentum factor return was -0.73% during months that included a volatility spike or the month immediately following one, compared to +0.54% in all other months—a statistically significant difference.

Breaking it down by decade, the most recent period (2014–2024) showed the sharpest divergence: momentum returned -0.96% per month around volatility spikes versus +0.65% per month in calm periods.

4. The Recent Decade Is the First Period of Consistently Weak Momentum

Looking at momentum factor returns going all the way back to the 1920s, the 2014–2024 period stands out as uniquely difficult—momentum averaged just 2.23% annually, compared to double-digit annual returns in most prior decades. Notably, the 2004–2013 period also showed poor overall results, but that was largely due to a catastrophic -83.81% momentum return in 2009 alone (a classic momentum “crash” driven by the market’s sharp recovery from the financial crisis). Excluding 2009, momentum would have averaged 7.17% annually during that decade. The 2014–2024 period, by contrast, saw consistently weak momentum across multiple years—exactly what the volatility spike hypothesis would predict given how frequent and fast-reversing spikes became.

5. The Sweet Spot for Moving Averages (MA)

In terms of getting a higher number of volatility spikes and higher daily S&P 500 returns during the volatility spike reversal period, Mozes found that the “sweet spot” would seem to be the three-month MA.

Mozes’s findings are consistent with those of Andrew Berkin’s 2021 study “When and Why Does Momentum Work–and Not Work?” – though Berkin’s paper focused on single stock momentum while Mozes’s focused on the overall market.

His findings led Mozes to conclude:

“Effectively, these results imply that increased market efficiency is driving weaker momentum performance in recent years.”

Investor Takeaways

The Headwinds for Momentum May Persist

If the conditions that are causing momentum to underperform—more frequent volatility spikes combined with faster reversals—are structural features of today’s markets rather than temporary phenomena, then momentum as a standalone factor may continue to deliver disappointing results. The paper argues that because these spikes seem to reflect a more efficient market’s rapid response to information shocks, there’s no obvious reason to expect conditions to revert to the earlier regime.  

Mozes explained:

“A market in which information is more efficiently processed, but which experiences more frequent volatility shocks is likely to be one in which average volatility levels are lower but volatility of volatility is higher.”

Don’t Abandon Momentum Entirely—But Be Smarter About It

The paper’s primary practical recommendation is nuanced: investors who use momentum should dampen or discount momentum signals when the stock price move driving the signal coincides with a volatility spike. In other words, if a stock (or the market) has declined sharply during a period when the VIX has spiked, that decline may not represent a true momentum signal. It may instead represent a fear-driven dislocation that is likely to reverse—and acting on it as if it were a genuine trend could lead to losses.

This is a meaningful refinement of traditional momentum approaches, which typically don’t distinguish between trend moves driven by fundamental information versus those driven by volatility spikes and fear.

Volatility Spikes May Offer a Contrarian Opportunity

There is a flip side to the momentum story. If volatility spikes are typically followed by strong S&P 500 returns during the reversal period, that creates a potential opportunity for investors willing to be contrarian. The research documents that buying the S&P 500 when a volatility spike occurs and holding through the reversal has historically been a profitable strategy—though it comes with real risks, including the occasional severe loss (as happened in late 2008 and April 2020, when volatility continued to rise rather than reverse). This is not a strategy for the faint-hearted, and the paper is candid that there is no clean way to filter out the big losing trades in advance.

Higher Valuations, Lower Average Volatility: A Mixed Picture

One broader implication of the research is that the same market efficiency driving faster volatility reversals may also be one reason equity valuations have trended higher in recent years. If markets resolve uncertainty more quickly, average volatility levels should be lower, and lower volatility supports higher valuations. The paper’s forward P/E data shows a clear upward trend in equity market multiples over the past two decades—consistent with this view. That said, the higher frequency of volatility spikes (even if they reverse quickly) means the ride can feel bumpier even as average volatility stays contained.

The Bottom Line

The research offers a coherent, data-driven story: markets have become more efficient at processing information shocks, but that very efficiency creates a more difficult environment for momentum investing. Volatility spikes are more frequent, they reverse faster, and each cycle chips away at momentum strategies by whipsawing positions.

For investors, the key takeaways are straightforward. Be cautious about acting on momentum signals that coincide with a volatility spike—those signals may be noise rather than genuine trend information. If you’re a contrarian investor, understand that volatility spikes have historically been followed by meaningful market recoveries, though the exceptions (2008, 2020) are severe enough to demand humility. And if you’re evaluating momentum as a factor going forward, be realistic: the structural environment that produced its strong historical returns may have changed in ways that are hard to reverse.

Larry Swedroe is the author or co-author of 18 books on investing, including his latest Enrich Your Future. He is also a consultant to RIAs as an educator on investment strategies. For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice.