The stock market is experiencing a rare trend that was connected to the last two market meltdowns. Here's why it's ominous for investors, and what they can do about it.

Reuters/Jason Lee

• Investors who are buying the stock market's biggest winners and selling the losers are seeing this strategy pay off significantly.
• However, quantitative strategists at Nomura have observed that so-called momentum factor investing is moving in lockstep with widespread risk aversion.
• This concurrent move is rare and connected to past periods of turmoil in markets, they observed.
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A trading tactic that profits from the stock market's biggest winners has been on fire lately.

But after quantitative strategists at Nomura peeked beneath its surface, they concluded that investor fears about risks - not their bullishness - explains the outperformance.

The strategy in question is none other than momentum factor investing, which involves buying stocks that have recently outperformed and selling the stragglers. The sector-neutral momentum factor with Russell 1000 stocks has returned nearly 23% since May 1 versus 4.5% for the index, according to Joseph Mezrich, the head of quant strategy at Nomura.

What is unusual about this is that investors' anxieties about the future have not historically driven high-momentum stocks. For a sense of how significant this trend is, Mezrich pointed out its two prior instances took place amid the technology crisis in September 2002 and the financial crisis in 2008.

To understand how risk aversion is driving momentum's success, Mezrich distinguished between the basket of stocks that investors are buying (the high-momentum side) and the basket they're betting against (the low-momentum faction). He found that the excess returns of both baskets were similar until May.

Since then, there's been a definitive split: the high-momentum basket with the winning stocks is surging and the low-momentum basket with the losing stocks is rolling over. The gulf between both is almost mathematically symmetrical as they've returned 6.5% and -7.4% respectively.

Read more: GOLDMAN SACHS: Recession fever has put hedge funds' most beloved stock trades in the crosshairs of disaster. Here's how to safeguard yourself from big losses.

The real driver of high momentum is risk

This is where the split gets even more interesting. Mezrich didn't stop at observing the departure between these two baskets, but showed how both sides of momentum are moving with investors' perceptions of risk.

When markets are going haywire and investors have a laundry list of reasons to be worried - like they do now - low-volatility stocks become even more alluring. Mezrich found that this cohort is outperforming almost in lockstep with the high-momentum stocks that investors have come to love.

"While there has been a consistent connection between high-volatility stocks and past losers (i.e., low-momentum stocks), it's relatively rare to see the connection between low-volatility stocks and past winners (i.e., high-momentum stocks)," Mezrich said in a recent note.

In other words, the desire for high-momentum stocks has become synonymous with a disdain for risky stocks, in Mezrich's view. And when investors previously traded on these two sentiments at the same time, the markets were in the thick of crises.

These days, the trade war is slowing growth in the world's largest economies and the bond market is flashing trusted warning signs of a recession. Whether these risks and others lead to another full-blown crisis is still up in the air. For now, investors are finding shelter wherever they can, be it in recent stock-market winners, low-volatility equities, or over in the bond market.

Mezrich also noted that the market's performance after past instances of the high-momentum/low-volatility pair trade has been mixed but decisive: stocks bottomed shortly after September 2002, but crashed after June 2008.

For investors worried about yet another awry outcome, Goldman Sachs recommends its basket of stocks most that hedge funds love the most.

According to Ben Snider, an equity strategist at the firm, hedge funds that have piled into the momentum trade face the risk of crowding into similar names.

Goldman's basket, which only includes fundamentally driven funds and screens out quant funds, exhibits a lower beta to the S&P 500 during rallies than it does during sell-offs, Snider said in a recent note. That means it could help investors hedge against the ongoing rush for strong performers.