Stocks on the Move With Price Momentum

An elementary principle of physics teaches that objects in motion stay in motion, unless acted upon by other forces. An increasing number of investors believe that Newton’s Laws of Motion apply to stocks as well.

Price momentum is often used as a signal that the market is taking notice of a stock’s underlying fundamental strength and that the stock price will continue to grow until fundamentals change. Technicians do not typically concern themselves with the underlying reason for a stock’s price strength, while fundamental investors look at relative strength as a marker for stocks worthy of further analysis.

This issue’s First Cut starts with exchange-listed stocks with a price above $3 per share that have positive earnings for the most recent 12 months. To capture price movement, the First Cut Screen looks for stocks with improving relative strength percentage rank from 52 weeks, to 26 weeks, to 13 weeks, and to four weeks. The relative strength rank indicates how a company’s stock price has performed relative to all other stocks. A rank of 84% indicates that a stock has outperformed 84% of all stocks over that timeframe. Momentum investors look for short-term relative strength to be greater than long-term relative strength. The stocks are then ranked by another popular price momentum measure—current price as a percent of 52-week high. The 30 stocks with the highest price as a percent of 52-week high made the First Cut.

Investors look for stocks with prices above their moving averages as a sign that the price is in an upward trend. It is also common to compare a short-term moving average to a longer-term moving average to measure the trend. The First Cut table provides both a shorter-term 50-day and a longer-term 200-day moving average. The market cap (share price times number of shares) provides an indication of size, while a basic sense of valuation is provided by the price-earnings ratio (share price divided by earnings per share).

To read more, please become an AAII Registered User or CLICK HERE.