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With current market conditions continuing to apply pressure to stocks across all sectors, a major emphasis has been placed on value investing, as bargain-hungry investors scour the financial landscape for stocks with historically low prices or valuations. This is unquestionably a great investing methodology.
But the most successful investors, consistently producing the best results, understand that market conditions can change in a flash, and that is why it is so important to have multiple trading strategies to leverage against different market conditions in order to maximize returns.
An essential component of any effective investment philosophy is Momentum investing, which has produced incredible returns for countless number of investors since the inception of open-market trading. So although Momentum may not be the flavor of the day, now is the perfect opportunity for any investor to develop a momentum trading strategy, or make further enhancements to an existing model. Because as noted by Sun-tzu in The Art of War, "Every battle is won long before it is ever fought."
What is Momentum Investing?
Momentum trading is an investment style that aligns investors with markets that have been aggressively trending, in an attempt to exploit any short-term or long-term opportunities to benefit from the prevailing sentiment. This momentum can be a product of either anticipated or actual earnings, but in either instance, the objective is to get on board with a stock that is accelerating and ride the wave of enthusiasm.
How is Momentum Established?
There are an infinite number of circumstances that can create momentum, and Zacks has plenty of excellent resources in order to identify these opportunities.
On a fundamental basis, one of the leading drivers of momentum is a healthy quarterly earnings report. When a company steps up and handily beats the street, this sends a very bullish message to the market, and investors are quick to respond, snapping up shares and sending prices higher. Zacks has an entire page exclusively dedicated to tracking and documenting companies historical quarterly performances, called Estimates. Zacks also provides a Price & Consensus Chart, which is a chart that documents the relationship between earnings estimates and share performance. Both of these tools are excellent resources for identifying an existing or developing trend, leading the well-prepared momentum investor to the doorstep of opportunity.
Momentum can be born out of technical formations as well. This frequently happens when a company's stock price crosses a particularly sensitive price point, a 52-week high for example. The market perceives this as an indicator that the company is progressing towards its goals and targets, and can hatch significant amounts of investor enthusiasm. Zacks has plenty of resources for identifying these types of situations as well, but one of the most powerful is the Zacks Custom Screener. This is an excellent tool for the previously mentioned criteria because it contains features that allow users to zero-in on stock prices in a relative or absolute capacity. For example, companies trading within 3% of their 52-week high, or stock prices between $95 and $100.