There are two powerful forces that dominate finance:
- Momentum
- Reversion to the mean
The first force is often associated with the momentum factor. The stocks that did well continue to do well. In a way, market capitalization based indexes are like a mild momentum play.
The second force tells us that all good things must come to an end. A stock or asset class that is too cheap versus its intrinsic value will have to revert to its fair value. A stock or asset class that is too expensive would have to come back down to earth.
It should be noted that momentum is rather interesting in that it does not have to be expensive things. Cheap things can develop momentum as well.
For a long time, many thought leaders pointed out that we get more momentum and less reversion to the mean is due to cheap money from quantitative easing....
