Hello reader, welcome to the latest issue of HX Weekly!

Each week we bring you a new edition of HX Weekly that includes three distinct sections.

In the first section, Thoughts on the Market, we'll offer insights into current economic and market news.

In the second section, HX Daily Redux, we'll revisit investing concepts, tactics, and more from past issues of HX Daily.

And in the third section, Market Wizard’s Wisdom, we’ll share thoughts, quotes, and theories from the greatest investing minds of all time.

Now, let's dive in!

Thoughts on the Markets

The Premier Anomaly: Why Momentum Trading Has Captivated Wall Street for 30 Years

There's a scene that plays out in nearly every investment seminar.

Someone in the audience asks if it's possible to consistently beat the market.

The speaker (usually quoting Eugene Fama, father of the Efficient Market Hypothesis) smiles and says, "Sorry, but research shows you can't."

Except that's not quite what Fama said.

In fact, the Nobel Prize-winning economist who built his career proving markets are efficient, made a stunning admission: There's one glaring exception to his theory.

One pattern that refuses to go away, no matter how many academics try to explain it.

Fama called it the “premier anomaly." And it’s one that I’ve staked my entire career on — momentum.

Let’s talk about it.

The Pattern That Shouldn't Exist

Here's what momentum means in plain English: Stocks that have been winning tend to keep winning.

Stocks that have been losing tend to keep losing, at least for a while. This shouldn't happen in an efficient market.

If everyone can see that a stock has been going up, why would smart money keep buying? Shouldn't they expect it to fall back to "fair value"?

Yet 2024 experienced one of the strongest momentum runs of the past 30 years.

The AI boom created exactly the kind of explosive moves momentum traders dream about — stocks rising not because of subtle improvements in fundamentals, but because capital itself became a force multiplier.

Think about Nvidia's journey from $200 to over $900 in less than a year.

Or the lesser-known names that rode the AI wave, companies building data centers, cooling systems, and networking infrastructure.

Many of these moves weren't driven by patient value investors poring over spreadsheets.

They were driven by what traders call "price action" — the raw force of buying pressure creating its own momentum.

The Academic Backbone

The funny thing about momentum is that it's one of the most heavily researched phenomena in all of finance.

It's not some fringe theory cooked up by day traders. It's been validated across:

• Multiple decades of data

• International markets from Asia to Europe

• Different asset classes (stocks, bonds, commodities, and currencies)

• Various holding periods from weeks to months

The seminal research came in 1993, when academics Narasimhan Jegadeesh and Sheridan Titman published findings showing that buying recent winners and selling recent losers generated significant excess returns.

Their work sent shockwaves through the finance world because it directly contradicted the prevailing wisdom that markets were perfectly efficient.

What made this research bulletproof was its simplicity.

The strategy didn't require insider information, complex algorithms, or privileged access. Just basic price data — information available to anyone with a newspaper (or today, a smartphone).

When asked about momentum strategies and whether markets can be beaten, Fama responded, "Ya, Momentum is the biggest example."

Why Does Momentum Work?

If momentum is so well-documented, why doesn't everyone exploit it until it disappears?

That's the $64,000 question. Academics have offered several explanations:

Behavioral Factors: Investors systematically underreact to news.

When a company announces strong earnings, people are initially skeptical.

They wait for confirmation.

By the time the story becomes obvious, the stock has already made a significant move. But there's often more to come as late adopters finally jump in.

Institutional Constraints: Large funds can't move quickly.

By the time a pension fund approves a position in a hot stock, retail traders and hedge funds have already captured the early gains.

But paradoxically, when the institutions finally arrive with billions to deploy, they create the next leg up.

Risk and Crashes: Momentum doesn't work all the time.

It experiences periodic crashes. Sharp, sudden reversals that can wipe out months of gains in days.

Many investors can't stomach this volatility, which keeps the strategy from becoming overcrowded.

The AI Momentum Machine

Which brings us to today's market. The AI sector has become a laboratory for studying momentum in real-time.

While Nvidia saw nearly a 200% increase last year, the median semiconductor company was down — a staggering divergence that may be one for the history books.

This bifurcation is textbook momentum: Capital concentrates in the strongest names, leaving laggards behind.

It's not about which companies have the "best" technology or the most reasonable valuations.

It's about which stocks are demonstrating the strongest price action.

Look at the pattern:

1. AI emerges as the dominant narrative

2. Early movers establish uptrends

3. Each successive wave of buyers strengthens those trends

4. Traditional metrics like P/E ratios become irrelevant

5. The strongest stocks pull away from the pack

This isn't just happening in obvious names like Nvidia.

It's cascading through the entire supply chain. Chip designers, foundries, data center operators, power infrastructure companies… even coffee chains are incorporating AI into their operations.

The Technical Framework

Professional momentum traders don't just buy whatever moved up yesterday.

They look for specific patterns:

Stage 1: Establishing the Uptrend. A stock breaks out from a period of consolidation on strong volume. This initial move often catches fundamental analysts off guard - the news hasn't changed, so why is it suddenly moving?

Stage 2: The Momentum Phase. Price makes higher highs and higher lows in a steady rhythm. Pullbacks are shallow and brief. This is where the real money gets made, as the trend becomes self-reinforcing.

Stage 3: The Acceleration. This is what traders sometimes call a "vertical move" or "parabolic phase." Price gaps up on huge volume. Everyone who was skeptical starts feeling FOMO (fear of missing out). This phase can last days or weeks.

Stage 4: The Exhaustion. Eventually, all momentum runs end. The trick is recognizing when the character of price action changes - when dips start getting deeper, rallies become unconvincing, volume dries up.

The Options Leverage Question

Here's where momentum trading gets both more powerful and more dangerous: options.

When you buy a stock, your potential gain is unlimited. But it takes substantial capital to generate meaningful returns.

A 50% move on a $10,000 position nets you $5,000. Nice, but not life-changing.

Options, however, offer leverage.

That same 50% move in the underlying stock might generate a 200% or 300% return on an options position — turning that $10,000 into $30,000 or more.

The catch? Options are wasting assets.

Every day that passes without the expected move, you lose money to time decay. And if you're wrong about direction, you can lose your entire investment.

This makes options ideal for momentum strategies in theory: You're betting on fast moves in stocks already in motion.

But it requires precision timing — getting in just as momentum accelerates, and getting out before it stalls.

What the Data Really Shows

Let's be clear about something important: While momentum as a factor has delivered excess returns historically, that doesn't mean every momentum trade wins.

Research shows that momentum strategies can experience predictable crashes, where the likelihood of loss becomes high enough that professional managers wouldn't commit their own funds. Yet, they keep clients' money invested due to competitive pressures and fee structures.

The average momentum strategy might win 55-60% of the time. But the winners can be large enough to more than compensate for the losers.

It's the opposite of picking up pennies in front of a steamroller. It's more like getting hit by small cars repeatedly while waiting for the occasional dump truck full of cash.

Recent analysis of momentum performance shows that success rates vary dramatically by market conditions.

In strong trending markets, momentum shines. In choppy, range-bound environments, it struggles.

The skill isn't just in identifying momentum — it's in recognizing when market conditions favor the strategy.

The Current Setup

So where does that leave us now, in late 2025?

Historical patterns suggest that after such strong momentum performance, a reversal often follows in the subsequent year.

That doesn't mean momentum strategies will stop working. It means the market leaders might change.

The AI trade has been extraordinary, but it's also crowded.

Everyone knows the narrative. When everyone knows something, the opportunity either needs to evolve or it needs to pause.

Smart momentum traders aren't just looking at last year's winners.

They're scanning for the next sector showing the early signs of institutional accumulation: unusual volume on up days, tight consolidation patterns after initial moves, and breadth expanding within an industry group.

That might still be AI, but perhaps in different names — the picks-and-shovels plays rather than the obvious leaders.

Or it might be an entirely different sector: gold miners, biotech, crypto-related stocks, or something we're not even thinking about yet.

The Bottom Line

Momentum trading isn't a magic formula. It's what Eugene Fama called "the premier anomaly" — a persistent market pattern that offers opportunity but comes with significant risk.

If you're considering a momentum approach:

Do:

• Understand you're trading price action, not fundamentals

• Use proper position sizing (never bet the farm on one trade)

• Have a clear exit strategy for both wins and losses

• Recognize that options magnify both gains AND losses

• Accept that even good strategies go through rough patches

Don't:

• Expect to win on every trade

• Ignore risk management because you're "sure" about a setup

• Chase moves that have already gone vertical

• Trade with money you can't afford to lose

• Forget that past performance never guarantees future results

HX Daily Redux

American Opportunity - Optimism and Failure

As mentioned in last week’s HX Weekly, we had traveled through Eastern Europe last year.

We had the opportunity to visit Hungary (Budapest), Croatia, Slovenia, and Slovakia. It has been a whirlwind tour and the first time I have done this type of trip since before COVID.

Traveling like this always makes me reflect. I was thinking about George Soros's journey, which we wrote about several times this week.

He was born in 1930 in Budapest and spent 17 years in Hungary – including his teen years during the height of World War II and the Nazi occupation. Remember that over 550,000 Jews died during this period.

The fact that he survived is amazing.

It is even more incredible that he went on to become one of the most famous and richest investors of all time.

What we were reflecting on is how his life story is uniquely AMERICAN.

There is no other country in the world that has produced so much wealth for individuals who come from hardship and nothing.

Two key elements of this history of American success are our unique combination of OPTIMISM and FAILURE.

Our readers have often heard us talk about optimism.

People who have difficult backgrounds—like Soros and me—and succeed are almost always optimists. Having grown up with a traumatic childhood, optimism is the best survival mechanism.

America is unique in that optimism is not only encouraged but rewarded. It is truly a place where you can believe in yourself and, with enough hard work and some luck, achieve incredible results.

That is not to say that there are no other countries where people who grow up with nothing go on to succeed. It is the magnitude that is different in America. Many more succeed, and the success can be much more significant.

This is directly correlated to the American culture of optimism. There is no other country where the “big ideas” actually have a chance to work out!

Another unique aspect of America that we reflected on was the concept of failure.

This is spoken about less but is vital to the American psyche.

We have built an economy and society that accepts and deals with failure.

In many other countries, they do not let enterprises fail and have broad social security and social safety nets. There is nothing wrong with either of these ideas; they produce great lifestyles for the populace.

These characterizations define much of Europe – especially over the last three decades.

The problem is that while not allowing failure to happen is a noble purpose, the economy can't evolve and grow.

This chart is difficult to read, but it shows the GDP per capita of individual states compared to the countries in Europe. Here is the chart…

The orange bars in the chart show the GDP per capita (in dollars) for every US state, and the green bars show the GPD per capita for every European country.

Only two European countries—Luxembourg and Ireland—are in the top 30. We suspect the Irish data may also benefit from the earnings of citizens living outside the country.

The EU average is only greater than TWO of the states – Idaho and Mississippi.

This data is not perfect, and its calculations involve many assumptions. However, it could also be argued that the large number of social services available freely in the EU make the real purchasing power and lifestyle of its citizens better than it appears here.

Though we have seen many versions of this data set, they are all similar.

TODAY – the average American is far out-earning the average European.

This doesn't mean Europe is bad. Again, its decision not to allow failure and build a broad social safety net creates a great lifestyle for its citizens.

However, we think it may not be sustainable over time. The American model—while more volatile—has a greater chance of sustainable prosperity.

Our acceptance of failure is a seldom discussed key to our success.

We think that this combination of OPTIMISM and FAILURE makes the American system uniquely successful.

Market Wizard’s Wisdom

The Morgan Stanley Market Wizard

Tomorrow (October 25) marks the third anniversary of the death of famed Morgan Stanley market strategist Byron Wien.

That is a name that you may not have heard in a while, but Wien was well known for his annual prediction list of “10 Surprises” which he published for 38 years.

Wien was born in Chicago in 1933 and after receiving both his undergraduate and MBA from Harvard, embarked on a legendary 58-year Wall Street career. After beginning in money management in 1965, Wien joined Morgan Stanley in 1985 and spent the next 20 years there as their Chief Market Strategist.

This is where he gained his fame with his list and many astute predictions.

After a couple of years at legendary hedge fund Pequot Capital, he joined Blackstone in 2009 and worked until his death at the age of 90.

Wien combined keen insight into both the markets and life.

Today, we share some of his “20 life lessons” which were shared here by Blackstone after his death.

We encourage you to read the full list from the article and here are our favorites. Enjoy!

We will take this one from an investment perspective.

This is a big one in our INVESTING publications. We think that one of the reasons that investors fail is that they focus on goals that are too low.

We only get interested in an idea if we think it can go up a minimum of three to fives times over the next five years.

There are always dozens (if not hundreds) of stocks that do this over that time frame. Why aim for less?

True in life and TRADING and INVESTING.

We always encourage analysis of portfolios to START with the losers and the positions causing you the most angst.

Deal with the problems first and you not only cut your losses but improve your psychology.

This is a favorite of both Warren Buffet and Charlie Munger. It is also something that I (Enrique) believe in very much.

Every day, I read at least a half dozen newspapers (NY Times, NY Post, Washington Post, Wall Street Journal, etc.) and more than a dozen newsletters.

The idea is that we want ALL the information. We know how to process it and find the most important pieces.

It also allows you to expand your horizons and generate great ideas.

A process of examination and setting goals is something that can be difficult to do as we are focused on the “day-to-day” of life.

It is an absolute necessity in improving your TRADING performance.

Create the list of what you have done well and done poorly every month. Do more of the first and less of the second going forward.

This is more of a “life” lesson rather than a market lesson, but we strongly believe in this idea.

Our plan is to keep on writing about the markets until we literally can’t do it anymore.

With a little luck (and diet and workouts – ha ha), maybe we can achieve what Wien did!

We hope that you’ve enjoyed this week’s issue of HX Weekly…

Do you have any thoughts, questions, or feedback? Tell us more in the comment section or at [email protected].