Momentum and reversion each carry their own literature, their own factor products, and their own crowd of adherents — as if markets ran two unrelated engines. The paper’s claim is that they were never independent: they are connected behaviours that transform into each other, and the dynamic drives not just markets but natural systems generally.
Why did generations of researchers miss it? Because they watched single assets — one price, one trend — instead of groups. Building on the Mean Reversion Framework, the paper classifies a collection of stocks into Value, Core and Growth bins and defines the trend as the percentage of components that transform out of their classification. At that resolution, the composite appears: all three bins exhibit it.
The mechanics
| Reading | Single-asset lens | Group (bin) lens |
|---|---|---|
| Momentum | A price trending | Components persisting in their bin |
| Reversion | A price snapping back | Components crossing bins toward the average |
| Relationship | Independent factors, separately harvested | One composite — each transforms into the other |
The rate is the signal
Once the composite is visible, the useful quantity is the rate: what share of components is persisting in its bin, and what share is transforming out. The two rates move out of phase — when transformation accelerates, reversion is doing the pricing; when persistence dominates, momentum is. No factor toggle, no regime guess: one dial, read continuously.
Watching the rate also disciplines patience. A slow transformation rate does not mean the framework is broken — it means the composite is resting. The costly mistake is abandoning one behaviour precisely when its counterpart is about to hand back the baton.
What it means for portfolios
If momentum and reversion are one machine, “factor timing” dissolves into something more tractable: state transition. A constituent is not a momentum stock or a reversion stock; it is a component with live odds of persisting or transforming. That is the N1 layer of the 3N™ engine — and the reason it prices both behaviours with a single model instead of toggling between two.
- Momentum and reversion are one composite — visible only at group level, not in single prices.
- The trend is a transformation rate: the share of components leaving their Value/Core/Growth bin.
- One state model prices both behaviours — no factor toggling, no regime guessing.
Pal, M. (2015). Momentum and Reversion. SSRN 2608342.
This note is provided for information and discussion purposes only. It does not constitute investment advice, investment research, a recommendation, or an offer or solicitation to buy or sell any security or investment product, and it should not be relied upon for any investment decision. Views are drawn from the referenced paper as of its publication date and are subject to change without notice. Exhibits are illustrative unless otherwise stated and do not depict the performance of any actual portfolio; hypothetical and idealized results have inherent limitations and do not reflect actual trading. Past performance does not guarantee future results. AlphaBlock Technologies Inc. is a financial-technology licensor; regulated products are offered solely by licensed partners in their respective jurisdictions under their own documentation. © 2026 AlphaBlock Technologies Inc.