Momentum Investing News: Understanding the Basics and Beyond

Momentum investing is a strategy that focuses on buying stocks that are currently performing well and selling those that are underperforming. This approach is based on the idea that a stock's recent price movement is a good indicator of its future performance.

A key aspect of momentum investing is the concept of relative strength, which refers to a stock's performance compared to the overall market or its peers. For example, if a stock has been outperforming the S&P 500 over the past year, it's considered to have strong relative strength.

Investors who use momentum investing often look for stocks with high price momentum, which can be measured by metrics such as the 12-month price change or the rate of change in price over a given period. In some cases, investors may also consider other factors such as earnings growth and revenue growth.

Momentum investing can be a high-risk, high-reward strategy, as it involves buying stocks that may be due for a correction. However, it can also be a effective way to generate returns, especially in a bull market.

Investing is a strategy that can be based on either subjective forecasts or objective data. Stocks that have performed well in the past tend to continue to outperform in the future.

Investors can use various strategies to spot trends and predict when a rise will end. Timing is key for the largest profit.

Momentum investing is a type of strategy that focuses on market trends. It ties closely to behavioural economics, where investors buy stocks that are going up and aim to sell at the peak for profit.

Investors rely on historical returns to make informed decisions. They use data to identify stocks that have a high chance of continuing to outperform in the future.

Investors who use momentum investing strategies need to be careful not to wait too long and risk a reduction in gains or even losses.

Investing can be a powerful way to grow your wealth over time. According to a recent study, the average stock market return is around 7% per year.

Many people invest because they want to achieve long-term financial goals, such as retirement or buying a house. The earlier you start investing, the more time your money has to grow.

Investing can also provide a hedge against inflation, which can erode the purchasing power of your money over time. As the article notes, inflation can be a major concern for investors.

Some investors use the "dollar-cost averaging" strategy to reduce the impact of market volatility. This involves investing a fixed amount of money at regular intervals, regardless of the market's performance.

Investing can be a key part of a well-diversified investment portfolio. By spreading your investments across different asset classes, you can reduce your risk and increase your potential returns.

Momentum investing is a proven strategy that can help you achieve above-average returns in the long term. Studies from the 1990s, such as those by Jegadeesh and Titman (1993) and Fama and French (1996), have shown that momentum strategies can achieve higher returns than the broader market.

The momentum strategy is not about making subjective stock selections based on balance sheets and income statements. Instead, it follows the market trend and lets the gains speak for themselves, making it a low-risk investment strategy.

By focusing on stocks with strong price performance, momentum investing can reduce the risk of investing in underperforming stocks. This can lead to better risk adjustment and improved risk-return profiles for your entire portfolio.

Momentum investing works by exploiting market inefficiencies, particularly investor inertia, herd behavior, and overreaction and underreaction to news. Investors often react slowly to new information, leading to a delay in the full adjustment of stock prices, and momentum investors can capitalize on this delay.

A momentum strategy can serve as diversification within a portfolio, behaving differently from traditional long-only index strategies. This can improve the risk-return profile of the entire portfolio, making it a valuable addition to any investment strategy.

Research has shown that momentum returns are strong across different geographies and asset classes. For example, a study by Fama and French (2012) examined international stock returns for 23 countries and found that momentum returns were strong everywhere except for in Japan.

Here are some key facts about momentum investing:

Momentum investing is a strategy based on a simple principle: stocks that have performed well in the past tend to continue to outperform in the future.

It's based on objective data, not subjective forecasts.

The idea is that past performance can be a good indicator of future success.

Stocks that have done well in the past tend to keep doing well, and that's the core of momentum investing.

Momentum investing can be a powerful strategy, but it's essential to understand the benefits and risks involved. Trends are not permanent, and markets can change direction quickly, resulting in reduced profit or even losses.

Momentum trading can yield profits in a relatively short period when executed properly. Consistent and accurate investment practices are crucial for success.

Trends have the potential to reverse rapidly, so it's essential to stay vigilant and adapt to changing market conditions. Past performances do not guarantee future outcomes, and momentum traders must be prepared for unexpected changes.

Momentum trading is typically centred around the technical analysis of charts, whereas long-term investing requires understanding the fundamental factors influencing each investment. This difference in approach can be a key consideration for investors.

Here are some key points to consider:

Momentum investing has been a consistent performer over the past 20 years, with the MSCI World Momentum Index returning 11.37% p.a. from June 30, 1994 to September 30, 2024.

In Australia, research by S&P showed that high momentum stocks outperformed low momentum stocks on both an absolute and risk-adjusted basis, with similar return volatility and slightly smaller drawdowns over the period from December 2004 to May 2020.

Our own analysis of 200 of the largest listed companies in Australia found that the highest quartile momentum portfolio outperformed the lowest quartile momentum portfolio by almost 12% p.a. since 2011.

However, high momentum stocks can be particularly susceptible to sharp reversals, such as during the early 2020 COVID-19 pandemic, when the highest momentum stocks sold off around -44% compared to -36% for the benchmark ASX 200.

Despite this risk, investors who are willing to bear it can be rewarded with higher absolute and risk-adjusted returns.

Momentum indicators are tools that show the strength of a price trend, helping investors decide when to buy or sell.

The Relative Strength Index (RSI) is a number between 0 and 100 that measures the speed and change of price movements.

A positive RSI above 50 indicates a price is going up, while a negative RSI below 50 signals a price is going down.

The Moving Average Convergence/Divergence (MACD) compares two averages of an asset's price to identify price trends and measure momentum.

A buy signal is often triggered when the MACD line crosses above the signal line.

The Rate of Change (ROC) displays the percentage change in price from a previous period to the current one, helping investors identify whether a security is gaining or losing momentum.

A positive ROC indicates an increase in price, while a negative ROC signals a decrease.

A 52-Week High can be a signal of upward momentum as stocks close to their highest price in the past year usually perform better than those further from it.