Momentum investors don't try to predict when market cycles start or end but are more concerned with identifying which industry or asset type is entering a mark-up phase (growth component of the market cycle) and getting their money in as quickly as possible. There are a number of tools that can be useful when it comes to spotting these shifts, ways to gain an insight into recent performance and allow benchmarking across market, industry or asset type.
Here is a basic introduction to some of the most common measures.
Standard deviation: Standard deviation measures how much an investment strays from its average. For example, if 50p is one standard deviation for a stock that averages 400p, but is currently trading at 550p, this tells a momentum investor first, that the stock is very volatile and second, it has a lot of positive momentum since it is currently trading three standard deviations above its average.
Beta: Beta is useful because it measures an investment's volatility against a benchmark. For example, if you are comparing bonds with small caps and the bond beta is 0.8 this tells us that bonds will grow less than small caps, 20 per cent less to be exact. If the small cap index goes up by 20 per cent, this means the bond index with a beta of 0.8 will only increase by 16 per cent.
Alpha: Alpha compares an investment's expected performance, based on its beta, with its actual performance. If an investment has a negative alpha, that means it underperformed expectations. Momentum investors interpret this to mean that either the investment is poorly managed or that momentum is shifting somewhere else.
Sharpe ratio: The Sharpe ratio uses standard deviation to compare an investment's risk and returns. The higher the Sharpe ratio the better an investment's returns have been relative to the risk it has taken on. The Sharpe ratio is valuable because it is a relative measure since it allows momentum investors to accurately compare the risk and performance of completely different types of assets with each other.
Risk/return trade-off: A momentum investor is always at risk of timing a buy incorrectly and ending up under water. As with most things in investment, there are no guarantees, but most momentum investors accept this risk as payment for the possibility of higher returns.
High stock turnover: High stock turnover can be expensive in terms of fees. Even though low-cost brokers are slowly putting an end to the problem of high fees, this is still a major concern for most momentum traders, especially when buying only small parcels of stock at a time, making the trading fees a bigger percentage of the overall investment. Despite the fees issue, momentum investors tend to believe that it is better to minimise your losses by selling any stock at the first sign of weakness than to ride it down with the rest of the crowd.
Market sensitivity: Momentum investing tends to works best when there are strong market trends, either up or down. But the strategy works best during bull markets since investors tend to herd together much more. It can work in bear markets, too – but it can be more tricky since many traditional investors tend to pull out altogether during bear markets, shrinking the effect downward pressure on markets.
Turning tide top 10
Company | TIDM | Market value (£m) | Share price (p) | 12-month high (p) | 1-month relative strength (%) | 3-month relative strength (%) | 1-year relative strength (%) | PE ratio | Dividend yield (%) |
---|---|---|---|---|---|---|---|---|---|
Tissue Regenix | TRX | 42 | 9 | 11.5 | 67.7 | 85.6 | -33 | na | na |
Spice | SPI | 190 | 54 | 90 | 47.4 | 104 | -37.5 | 8.7 | 3 |
Norcros | NXR | 47.6 | 8.25 | 12 | 33.4 | 57.2 | -16 | 13.8 | 2.1 |
Camco International | CAO | 31.7 | 18 | 30.5 | 28.3 | 47 | -38.5 | 7.1 | na |
Vislink | VLK | 30.8 | 22.25 | 30.5 | 26.4 | 3.8 | -30.3 | 5.8 | 6.5 |
Scapa | SCPA | 22.8 | 15.75 | 19.75 | 24.9 | 24.2 | -7.2 | 8.8 | na |
Neovia Financial | NEO | 75.6 | 63 | 66 | 23.8 | 17.6 | -2.2 | 6.9 | Na |
Vectura | VEC | 146 | 45 | 96.5 | 22.8 | 10 | -44.5 | Na | Na |
AssetCo | ASTO | 52.2 | 57.5 | 85 | 22.1 | 8.6 | -15.2 | 5.7 | Na |
Tanfield | TAN | 24.6 | 33.25 | 68.25 | 20.5 | 19.7 | -57 | Na | Na |
Note:Ranked by highest 1-Month Relative Strength. Companies valued at less than £20m by market capitalization have been filtered out to avoid microcap firms and the most illiquid shares. Source: REFS Online |
Momentum movers top five: FTSE 100
Company | TIDM | Market value (£m) | Share price (p) | 12-month high (p) | 1-year relative strength (%) | 2-month relative strength (%) | PE ratio | Dividend yield (%) |
---|---|---|---|---|---|---|---|---|
Aggreko | AGK | 3,878 | 1,415 | 1,490 | 133 | 17.7 | 19 | 1 |
ARM | ARM | 3,653 | 278 | 293 | 98 | 18.5 | 32 | 1 |
Petrofac | PFC | 4,099 | 1,186 | 1,287 | 63.9 | 10.6 | 15 | 2.3 |
Fresnillo | FRES | 7,025 | 980 | 1,086 | 60.9 | 13.9 | 24 | 1.3 |
Burberry | BRBY | 3,312 | 762 | 813 | 53.5 | 15.8 | 18 | 2.2 |
Momentum movers top five: FTSE Mid 250
Company | TIDM | Market value (£m) | Share price (p) | 12-month high (p) | 1-year relative strength (%) | 2-month relative strength (%) | PE ratio | Dividend yield (%) |
---|---|---|---|---|---|---|---|---|
Senior | SNR | 492 | 123 | 136 | 175 | 8.7 | 12 | 2.4 |
Euromoney | ERM | 703 | 600 | 630 | 150 | 6.8 | 12 | 2.8 |
International Personal Finance | IPF | 490 | 191 | 280 | 121 | -8.9 | 7 | 3.8 |
Chloride | CHLD | 1,016 | 386 | 387 | 118 | 45.6 | 30 | 1.5 |
Melrose | MRO | 1,047 | 210 | 242 | 94.8 | -0.1 | 10 | 4.3 |
Momentum movers top five: FTSE Small Cap
Company | TIDM | Market value (£m) | Share price (p) | 12-month high (p) | 1-year relative strength (%) | 2-month relative strength (%) | PE ratio | Dividend yield (%) |
---|---|---|---|---|---|---|---|---|
Minerva | MNR | 176 | 109 | 124 | 603 | 0.49 | Na | Na |
Scott Wilson | SWG | 196 | 266 | 266 | 249 | 243 | 17 | 1.6 |
TT Electronics | TTG | 149 | 96 | 110 | 145 | -1.8 | 13 | 1.6 |
Dialight | DIA | 94.8 | 300 | 340 | 101 | 10.2 | 14 | 2.6 |
Volex | VLX | 86.9 | 153 | 168 | 99.5 | 14.9 | 8 | 0.1 |
Momentum movers top five: Aim
Company | TIDM | Market value (£m) | Share price (p) | 12-month high (p) | 1-year relative strength (%) | 2-month relative strength (%) | PE ratio | Dividend yield (%) |
---|---|---|---|---|---|---|---|---|
Minerva | MNR | 176 | 109 | 124 | 603 | 0.49 | Na | Na |
Scott Wilson | SWG | 196 | 266 | 266 | 249 | 243 | 17 | 1.6 |
TT Electronics | TTG | 149 | 96 | 110 | 145 | -1.8 | 13 | 1.6 |
Dialight | DIA | 94.8 | 300 | 340 | 101 | 10.2 | 14 | 2.6 |
Volex | VLX | 86.9 | 153 | 168 | 99.5 | 14.9 | 8 | 0.1 |
Note: Ranked by highest 1-year relative strength. Companies valued at less than £20m by market capitalisation have been filtered out to avoid micro-cap firms and the most illiquid shares. Source: REFS Online |