Momentum investing usually involves a strict set of rules based on technical indicators that dictate market entry and exit points for particular securities. Momentum investors sometimes use two longer-term moving averages, one a bit shorter than the other, for trading signals. Some use 50-day and 200-day moving averages, for example. The 50-day crossing above the 200-day creates a buy signal. A 50-day crossing back below the 200-day creates a sell signal. A few momentum investors prefer to use even longer-term moving averages for signaling purposes.
This might finally make momentum stocks attractive again amid the elevated level of uncertainty in the market today. Things have improved a lot for the factor since late last year, according to Bernstein’s McCarthy. Thanks to the more diversified sector composition, correlation among high-momentum stocks has fallen sharply, which means they are less likely to crash together in case of volatility.
Analysts usually upgrade their earnings estimates for high-momentum stocks more than low-momentum stocks, creating an overly bullish sentiment among investors that could often make the high-momentum stocks very crowded. That behavior has moderated over recent months, noted McCarthy, and the momentum strategy has become less crowded since the fourth quarter last year, though still above historical levels.
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TV is another way to monitor the market each day with CNBC being the most popular channel. Even turning on CNBC for 15 minutes a day will broaden an investor’s knowledge base. Don’t let the lingo or the style of news be a nuisance, just simply watch and allow the commentators, interviews, and discussions to soak in. Beware though, over time you may find that a lot of the investing shows on TV are more of a distraction and are overall full of junk recommendations. This is a natural evolution; you are not alone!
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