Momentum investing has been one of the most persistent and puzzling phenomena in finance for more than three decades. Traditional explanations typically focus on investor psychology, delayed information diffusion, or risk compensation. But this paper proposes something radically different. The authors argue that momentum profits are largely driven by institutional cash-management mechanics. Specifically, investors needing settled cash before month-end systematically sell their losers. And this predictable “dash-for-cash” creates a highly concentrated momentum effect during just six trading days every month.
The Intramonth Momentum Cycle
- Daniel Nathan, Matti Suominen, and Joni Tasa
- Working paper, 2026
- A version of this paper can be found here
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Key Academic Insights
Momentum profits are concentrated in just six trading days
The paper finds that the vast majority of momentum profits are earned during a narrow six-trading-day window before month-end, called the PreTOM period. From 1980 to 2025, a momentum strategy implemented only during these days dramatically outperformed the same strategy held during the rest of the month. This suggests momentum is highly time-dependent rather than evenly distributed across trading days.
Momentum is mostly about losers losing
The results show that momentum profits are overwhelmingly driven by the underperformance of loser stocks rather than the outperformance of winners. During the PreTOM window, loser stocks experience significantly larger negative returns, while winners display little unusual behavior. This asymmetry challenges many traditional explanations of momentum that assume symmetric effects across both sides of the trade.
The mechanism is a predictable “dash-for-cash”
The authors argue that institutional investors regularly need settled cash before month-end, creating predictable selling pressure. When raising liquidity, investors tend to sell their losing positions first because they are easier to liquidate psychologically, often carry tax losses, and typically pay fewer dividends. The evidence from trade-level data and mutual fund flows strongly supports this liquidity-management explanation.
The T+1 settlement reform provides causal evidence
The SEC’s transition from T+2 to T+1 settlement in May 2024 created a natural experiment for testing the theory. After the reform, the concentration of loser-stock selling shifted exactly one trading day closer to month-end, consistent with the shorter settlement cycle. This timing shift appeared in both stock returns and mutual fund data, providing unusually strong causal evidence for the proposed mechanism.
Momentum crashes occur in a different part of the month
The study shows that momentum crashes do not occur during the profitable PreTOM period. Instead, crash risk concentrates near the beginning of the month, while the strongest momentum gains occur before month-end. This separation indicates that PreTOM profits are not simply compensation for avoiding crashes but reflect a distinct liquidity-driven process
The effect is strongest among liquid institutional stocks
The PreTOM effect is much stronger among highly liquid loser stocks, particularly those heavily owned by institutions. Stocks with lower bid-ask spreads experience larger underperformance during the liquidity window, which is consistent with institutions preferring to sell positions that can be traded cheaply and quickly. Illiquid microcap stocks show much weaker effects.
The effect survives internationally
The paper documents similar PreTOM momentum patterns across 19 developed international markets. In most countries, loser stocks significantly underperform during the same pre-month-end window, while winners exhibit little comparable behavior. The consistency across markets strengthens the argument that the phenomenon reflects institutional trading mechanics rather than country-specific behavioral biases.
Practical Applications for Investment Advisors
Momentum may be more structural than behavioral
The findings suggest momentum is not purely driven by investor psychology or risk premia. Institutional liquidity management may play a major role. That has important implications for how advisors interpret factor behavior.
Calendar timing matters
Momentum returns are not evenly distributed throughout the month. Understanding when momentum profits historically occur may help advisors better interpret short-term factor performance and periods of apparent factor breakdown.
Loser stocks may carry hidden liquidity risk
The paper highlights that past losers can become liquidity providers during institutional cash-demand periods. This may help explain why the short side of momentum strategies often dominates performance.
Momentum crashes are distinct from momentum profits
The profitable window and the crash window are different. This distinction may matter for risk management, portfolio implementation, and understanding factor drawdowns.
How to Explain This to Clients
“Momentum investing may work partly because institutions behave predictably around month-end. When investors need cash for settlement obligations or redemptions, they often sell their losing positions first. That creates temporary selling pressure in loser stocks during a very specific part of the month. Over time, this repeated cycle helps generate momentum profits.The research suggests momentum is not just about investor psychology or risk-taking. It may also reflect the plumbing of how financial markets operate”
The Most Important Chart from the Paper
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged and do not reflect management or trading fees, and one cannot invest directly in an index.
Abstract
U.S. equity momentum returns concentrate in just six trading days each month, the window ending four days before month-end. We show this concentration arises from investors’ dash-for-cash: predictable month-end payment obligations create demand for settled cash, leading investors to sell, and the stocks they sell are their losers. A value-weighted WML strategy invested only during these six days turns $1 into $18.78 over 1980–2025, compared with $2.37 during the rest of the month. The concentration is asymmetric: bottom-decile losers underperform by an additional 7.2 basis points per day during the window, while winners show no corresponding pattern. The SEC’s May 2024 transition from T+2 to T+1 equity settlement provides causal identification: the predicted one-day shift in the selling window appears in individual stocks and in mutual fund returns. Three episodes of acute fund outflows confirm the broader mechanism: when investors need cash, they sell their losers; the same loser-driven pattern replicates across 19 developed markets. The result also revisits Carhart’s past-loser fund underperformance: the momentum-loading component is realized largely in the PreTOM window, while expense drag operates throughout the month. Crashes concentrate at month-start, not during PreTOM. The findings recast momentum as a feature of equity market plumbing rather than a property of investor beliefs or priced risk.
About the Author: Elisabetta Basilico, PhD, CFA
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Important Disclosures
For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Third party information may become outdated or otherwise superseded without notice. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency has approved, determined the accuracy, or confirmed the adequacy of this article.
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